College financial planning ultimately comes down to figuring out how you’re going to pay for college. Typically this is the responsibility of parents.
Ideally, planning should start before a student’s junior year and must be completed by the end of that year.
If you have a junior and haven’t started by now, you need to get to work as quickly as possible.
However, if you have a freshman, sophomore or senior, it’s never too early or too late to get started.
The earlier you start, the more opportunities you’ll have to save on college. But the worst choice is to never plan at all.
There are five key parts to a good college financial plan. These include:
- Need-based aid
- Merit-based scholarships
- Tax Savings
- Saving & investing
Some or all of these may apply depending on your family situation, the college you choose, your eligibility, and your personal preferences.
Let’s take a look at each of these five parts and what families and students will need to do in these areas.
1. Need-Based Aid
This type of aid is awarded to families based on their financial situation. This type of aid is awarded by the federal government, state governments, colleges and private institutions.
Based on those applications, you may be awarded need-based aid depending on your income and assets compared to the cost of the schools your student is considering.
Need-based aid can be a big component of college planning for some families, while others may not qualify for it.
Many families are unsure about how it works or whether they qualify, so you can start by visiting my Student Aid Index (SAI) calculator. The SAI is a number that is calculated as part of the FAFSA process, and most colleges use it as a reference in determining how much need-based financial aid to offer your family, based on your income, financial assets and other factors.
To calculate your SAI based on the actual formulas used in the FAFSA process, use my calculator to plug in your numbers and get an estimate of how much need-based financial aid you’ll qualify to receive.
2. Merit-Based Scholarships
Scholarships deserve their own category because there are multiple types and many opportunities available.
Scholarships include merit-based scholarships from schools, scholarships that don’t require planning or student applications, and private scholarships.
They’re a great way to get free money for college, but not everyone will qualify. Opportunities will also vary based on each school.
The most common scenario is a student who’s a high achiever and qualifies for academic scholarships.
But merit-based scholarships also apply to athletic ability, musical talents, extracurricular achievements or volunteer work, or even diversity and geographical location.
That’s why it’s important to understand the types of scholarships available, how they work, and what you need to do.
This will give you a better chance to win scholarships or give you a more realistic sense of the possibilities for your student.
To get started, check out my free video course, The Scholarship Guide for Busy Parents.
The course contains four videos, each shorter than 15 minutes.
It will teach you about all the types of scholarships, which are appropriate for your student, and give you everything you need to develop a plan and take action.
3. Tax Savings
Many families will qualify for tax breaks while saving money for college, and you want to take all the tax benefits you qualify for.
The three categories of college-related tax breaks are:
- Saving and investing with tax advantages (see section #4 below).
- The American opportunity tax credit. Many families can save $2,500 per year per student, for up to four years. For example, a family with three children could save $30,000 in taxes over their kids’ college years.
- Student loan interest deduction. Parents and students can reduce their taxes when they pay student loan interest. However, the potential tax savings don’t necessarily make student loans a good idea, although they can be considered as part of your overall plan.
To learn more about potential tax savings and deductions related to college expenses, you can check out my podcast on this topic, entitled “Understanding College Tax Deductions.”
4. Saving & Investing
To save more for college, you’ll need to understand how much you’ve currently saved and figure out what you can add over the next couple of years.
You also need to find a financial and investment advisor that understands college. Saving and investing are good things to do, but they can impact your qualifications for need-based aid or influence your potential tax savings.
There are also specialized strategies that can help you maximize your college savings and save considerable money on your taxes in the process.
This is why it’s important to work with a knowledgeable advisor that can help you navigate the challenges of saving and investing for college specifically.
You can learn more about advisors and how they can help you save and invest for college in my article on college financial planners, and you can always contact me to seek college planning and financial advice.
Most families would prefer to avoid loans, but sometimes they’re the most reasonable way to fill gaps in a realistic college budget.
Loans are available to both parents and students to borrow, and the best options have favorable terms and interest rates. Ideally, if you need to borrow money, loans should be part of a larger college financial plan.
However, all too often, people get in over their heads with student loans and other loans for college. This happens because they fail to plan, and it’s an easy source of emergency
funds, similar to using credit cards. It’s a short-term fix, in the heat of the moment, with potentially negative long-term consequences.
If you don’t use loans wisely, you can end up paying more than necessary and borrowing needlessly.
Instead, the end goal should be to develop a realistic college budget. It should take into account the colleges you’re considering and the financial resources you have available to repay any loans.
A good financial plan will help you understand the real cost of college, how much your family needs to pay, and the amount of loans that might be reasonable.
It can also identify opportunities to get the same quality of education at a lower cost, or save money while your student attends the school of their dreams.
For more on student loans and other college loans, check out my Quick Guide to the Best Student Loan Options. It provides a crash course in the different types of loans that are available, the pros and cons of each option, and how to decide which ones might be right for you.
Getting Started with Your Planning
Start by subscribing to my free e-newsletter to get more great tips and advice on how to plan and save for college and how to put your student on the path to a bright future.
You can also sign up for my video course, the College Planning Jumpstart, where I’ll show you how to create a winning college financial plan for your family and how to pay for college without wiping out your finances or your retirement.
If you’re interested in working with me directly, I’m also available to serve as your professional college planner and financial advisor.
To learn more about my college financial planning services, explore options, and make arrangements, visit my Work with Brad page at my financial advising website, Baldridge College Solutions. Or call me at 414-529-9400.
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