Trying to Plan for College, But Not Sure Where to Start?

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One reader recently emailed me with questions about budgeting for her daughter's college education.  Her daughter is 14 and she's starting to think about sending her to college, the reader said, but she's not sure where to start. 

Here's some background, and some tips.

Background:

The College Board reported that average undergraduate tuition during the 2013–14 school year is:

  • $8,893 for in-state students
  • $22,203 for out-of-state students
  • $30,094 at private schools

People can save money for college in tax-advantaged accounts. Two popular options include the 529 College Savings account (usually called a 529 plan) and the Coverdell Education Savings Account (also known as the Coverdell ESA, or simply the ESA).

Anyone can open a 529 or ESA account, including parents, uncles, aunts, grandparents, or people who aren't related to the student at all. People over age 18 can also open a 529 plan for themselves, e.g., if you're planning on sending yourself back to school.

Financial Aid:

Financial aid is calculated by a simple formula: Cost of Attendance minus Expected Family Contribution (EFC) equals Need.

   Cost of Attendance -- EFC = Need.

EFC is based on a number of complex factors, such as the students’ assets, parent’s taxable assets and parent’s age.

EFC methodology depends on which financial aid form the institution requires (the Free Application for Federal Student Aid or the CSS Profile), but long story short: parents are expected to pay 5.64 percent of their assets towards college education after deducting for an “asset protection allowance,” and thanks to recent legislation, student-owned 529 and Coverdell Education Savings Account assets count as parental assets.

If that sounds like gibberish, rest assured: You aren’t expected to cash out 100 percent of your 529 or Coverdell ESA right away. Your college savings will enjoy favorable treatment.

Tips:

If you're nervous about being able to afford college, the simplest answer is to opt for an in-state public college or university.

You can further save money by:

  • Take AP or CLEP courses during high school, which will award the student college-level credits, thus shortening the potential total time in school. Some students are able to shave a semester, or even an entire year, from their college experience -- which saves tens of thousands in expenses, and allows them to start earning money sooner.
  • Take an extra-heavy course load, if you attend a school that charges a flat fee once you're above a certain threshold of credit hours. For example, if your school charges a flat rate for any number of credit hours above 12, then take as many as you can -- perhaps 18 or even 21 credit hours -- to get the biggest bang for your buck.
  • Spend the first two years in community college, and then transfer. However, this is risky: Meet with an academic advisor to make sure the credits properly transfer. If the credits cannot properly transfer, the student will spend longer in school, incurring more expense.
  • Apply for as many grants and scholarships as possible. Don't expect one giant scholarship to cover everything; look for many small scholarships (as small as $500 or $1,000 increments) that will add up.
  • Live at home, to save money on housing, utilities and other cost-of-living expenses.
  • Buy used textbooks.
  • Work part-time (around 15-20 hours/week) during the school year and full-time during the summers.
  • Use student loans as a last resort, not the first.
  • Don't be afraid of student loans, however, if they are your only option. It's generally better to have a college degree than stopping after a high school degree, especially if you major in high-demand fields like engineering, programming, accounting, nursing, marketing, advertising and more.