Education Planning

The largest purchase many families will make is their children's higher education. While the return on this investment may pay big future dividends, the formidable cost of higher education demands thorough planning and even creativity to meet this goal.

The high and rising cost of higher education has created a dilemma for parents and a serious debt load for many children after graduation.  Parents cannot finance their retirement, so student loans and work study programs may be the best of your least desirable planning options.  Developing an effective college debt management program is an essential part of higher education planning.

Tax-advantaged higher education saving tools like 529 plans and Coverdell savings accounts can be helpful, but siphoning savings intended for your retirement into college saving accounts may create a new financial challenge.

Once your child approaches their college entry date, advanced planning may create financial aid opportunities, either needs-based or tuition grants from private universities.  The key factor in selecting the right school may be the one with the best financial aid package for parents with limited means.

Higher education funding is a retirement planning challenge.  Parents cannot save the same dollar for both.  A good education plan will help you take a realistic look at your financial resources and define your priorities.  It will quantify how much can you afford to contribute to your children's education without sacrificing your other goals and explore other funding sources at the child's disposal.

Financial Aid

The financial aid process can be a complex experience for the unsuspecting family that doesn't understand how the financial aid game is played.

Dollars available for merit-based financial aid - awarded on the student's scholastic record – are difficult to come by, especially at public universities.  Most financial aid takes the form of needs-based financial aid, tuition grants, student loans and work-study programs.

The process to apply for traditional needs-based financial aid is mechanical:  Complete and submit the Free Application Free Student Aid ("FAFSA") form by February (using estimated tax return data from the prior year) and then wait until the target colleges send a financial aid award letter in the early spring.

Depending on your family's EFC, which is determined based on the income and asset levels of both the parents and children, financial "aid" often takes the form of student loans and work-study programs – not much aid indeed!

For some families, especially those who own a small business, there are planning techniques to make your FAFSA and/or PROFILE form look more favorable for needs-based financial aid.

For the family that does not qualify for needs-based aid, financial aid planning centers on a "competitive appeal" strategy to create competition for your child in the form of tuition grants.  Many private colleges often offer significant tuition grants to attract higher caliber students or achieve their diversity goals, especially if there is competition for your child from another private college in their peer group.

Also don't forget the myriad local scholarship opportunities from community organizations eager to distribute grant money to worthy students.

Tax Scholarships

For affluent families who do not qualify for need-based financial aid, there are other education planning opportunities to consider.  In addition to a competitive appeal financial aid strategy to lower private college tuition, there are tax planning moves available to lower the parents' income tax liability.  These "tax scholarships" can create additional college savings, especially if you start when the child is young and if the tax savings are invested on a tax-advantaged, compounding basis.

Changes to the "Kiddie Tax" federal income tax laws have reduced the benefit of shifting unearned income to children as a tax reduction strategy.  However, a family owned business can employ their minor child and pay them wage income for their labor.
Earned income is not subject to the Kiddie Tax rules and would allow your child to fund an  IRA or Roth IRA.  Paying your child could generate tax savings plus tax-advantaged funds to fund your education goals, but be sure to consult with your tax professional first.

College Selection

The foundation of a good education plan starts with career planning to make the most of their college experience.  Sending a child off to college with little forethought as to what they want to do for a living or and how their higher education will advance them towards that goal could be an expensive mistake.  Career counseling for your child is available from the school guidance counselors and in the private sector as well.

In high school, children should invest the time to explore their future career interests, research the universities that specialize in their preferred fields of study and apply to the universities that best fit their expectations.

Academic scholarships are often available by professional associations and within the university for high school students and college students who aspire to a chosen profession.

If there are multiple number of suitable institutions, creating competition for your child by applying for tuition grants to all of them, especially if your child has a strong scholastic record and is considering a private college or university.

Student Loans

The most common form of financial aid is student loans and federal work-study programs.  Student loans and work-study are not true financial aid -  tuition grants and scholarships are - but they are an important part of college funding plans for many students/parents nonetheless.

There are a myriad number of federal and state government-sponsored lending programs available to students and parents to finance the cost of higher education.

An appealing but least available student loan program is the Perkins loan program.  This is a federal needs-based lending program, with below-market interest rates, no interest accrual and deferred repayment until after the student graduates or ceases attendance.

More commonly available loans are federally guaranteed private student loans.  Subsidized student loans are needs-based and look similar to the Perkins loan program, whereas the unsubsidized student loan is not needs-based, accrues interest from the borrowing date, but repayment is deferred until the student graduates or stops attending college.

Each state offers a number of education financing programs as well, including deferred student loans, loan forgiveness programs for certain industries, grants and scholarships.

For parents, the Parents for Undergraduate Students ("PLUS") loans are private loans on behalf of their child attending college that offer prevailing market rates of interest with long repayment terms that commence immediately.  The parents' credit standing will determine the degree to which PLUS loans are a financing option.

Finally, while home equity, 401(k) plan assets and cash value in life insurance can be alternative sources of educating financing, they should be used as a last resort for those parents struggling to balance their education and retirement funding goals - remember you cannot finance retirement!