College Funding Part I

May 1^st has come and gone – students have chosen their colleges for next year. Only one major question remains: how does a family pay the bill?

When it comes to funding college education, you need a game plan that matches funding sources with expected outlays. The good news is that there are more potential sources of college funding than the parents might think. They include:

Current parental income & bonuses 529 plans

UTMA, UGMA accounts Roth accounts

EE savings bonds Parental savings (stock options, etc)

Home equity lines of credit Parent Plus Loans

Student loans (government and private) Financial aid grants

Student income/work study

Grandparents (and gifts from other relatives/friends)

The strategy needs to incorporate other financial goals that loom, like retirement. Sometimes the sources available can be used for either retirement or college funding (Roth IRAs and non-qualified savings, for example). In addition, assuming debt can impact cash flow, and therefore, retirement contributions, parents need to understand that there are tradeoffs in their funding solutions.

For the funding map, each child (there is often more than one at different stages of the funding process) is listed on the grid with potential college costs, sources of funding and the years the funding will be needed. Once all of the variables are outlined, we assign the various sources to each of the college years, taking into consideration taxes, cash flow/debt management and financial aid eligibility.

Let’s use a simplified hypothetical example:

Married couple, one child: Mary is entering private college this fall. The total bill is $33,500, with a financial aid grant of $6,000 a year, Stafford loans of $3,500 and a work study program of $1,500, leaving a funding balance of $22,500. Let’s assume that the parents can afford to pay college costs of $10,000 a year out of current income; they have saved $25,500 for Mary in a 529 plan; and have $10,000 in EE Savings Bonds. Mary earns $2,500 at a summer job. Available equity in the home is $100,000. One funding solution may look something like this (for this example we assume 7% education inflation and 7% return).

Mary’s College Funding Map

Year	Approximate Costs	Parental Income	Grants/ Student Income	Student Savings	Parental Debt	Student Loans (Stafford)
2008-2009	$33,500	$10,000	$10,000	529 $10,000	$0	$3,500
2009-2010	$35,845	$10,845	$10,000	529 $10,500	$0	$4,500
2010-2011	$38,354	$11,500	$10,500	529 $7,045	LOC $3,809	$5,500
2011-2012	$41,038	$12,250	$10,500	EE Bonds $10,000	LOC $2788	$5,500

Each college funding map is unique and involves a number of decisions, which can trigger philosophical discussions; at other times major lifestyle choices. “Is there a limit on how much student loan debt the parents believe the kids should assume?” “Is the at-home spouse prepared to go back to work?” “If the first born goes to a private college, do the parents feel obligated to do the same for the other children?” Other potential issues involve allocating the funding sources to best position the family for financial aid and whether the parents feel comfortable talking to the grandparents about chipping in.

The college funding map is one tool. It is meant to spark dialogue and establish priorities, and should be revisited regularly. It serves its purpose best when it is established within the context of longer term goals for the parents and with respect to the student’s potential cash flow after college.

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If you are interested in learning more about paying for college, please feel free to call us and set up an appointment.