During this tax season, paying for college may not seem like a relevant topic. If you plan to send your children to college, though, you may need to have a conversation with your tax preparer. Financial aid administrators have the desire to find out how much money you can afford to pay to attend their institution.
Your accountant, on the other hand, has the desire to find out how little you can pay in taxes each year. If you are not clear about how to properly structure your finances, you will certainly pay more for college than the person who has a plan.
Strategies to Decrease the Financial Burden
1 – Increase Your Taxes Starting January of Your Child’s Junior Year in High School
Many people look forward to receiving a tax refund. They often use the extra money to purchase things they normally wouldn’t buy. This approach will hurt you financially for a variety of reasons. Based on the current financial aid formulas, if you enjoy a $3,000 refund each year during your child’s five-year college tenure, you could lose out on as much as $6,000 in grant money. However, if you invested $250/mo (or $3,000/yr) in an interest-earning account for the same five years earning 8%, you would have an additional $3369 in extra interest. If you combine both scenarios, that’s over $9300 of opportunity cost. Work closely with your accountant to get as close to a zero-refund as possible.
2 – Decrease the Expected Family Contribution (EFC)
There are strategic ways to lower the EFC. Interestingly, scholarships are not one of them. College savings plans such as 529s actually increase a family’s EFC because many of the grants are awarded based on need. There are financial vehicles that can strategically be used to lower a family’s out-of-pocket expense. Each situation is unique and therefore goes beyond the scope of this blog. There are experts who can provide you with assistance, but be sure they are well versed in college planning strategies.
3 – Take Less Time to Graduate
There are high schools designed for students who want to decrease the time it takes to graduate. These students have the opportunity to take college courses at a local participating college. In some cases, these highly disciplined students graduate from high school with an Associate’s degree.
4 – Identify a Major Before Attending College
This advice contradicts the notion that we should use our college years to explore our interests. The amount of units a student needs to graduate is based on a four-year scheduled timeline. Students, however, end up staying in undergraduate school five or more years in many cases. This trend is very costly for students and their parents. One reason this happens is because there is little emphasis placed on selecting a relevant major for college. Consequently, students go to college and don’t find out what they want to do even after their general education courses are completed. A simple solution is to provide high school students with more opportunities to identify their personality, strengths, and career interests.
4 – Time Is Your Best Friend—and Your Biggest Enemy
Be sure to take time to understand the most beneficial financial strategies you use when the financial aid administrators examine your finances. These strategies may concern your tax preparer during the college years, but your ultimate objective is to pay as little out of your pocket for college as possible. Do not wait until it is time to send your children to college to start understanding cost-saving strategies.
“Tax Planning vs College Planning” was provided by Dr. Len Cooper
Dr. Len Cooper is a Senior Marketing Director at PHP Agency (PHP) in Riverside, CA