College Financial Planning—what’s the right age to start?

Right after you plop on the little hat and wrap him or her in the blanket like a burrito! Right. I’m sure there are people who begin planning at birth. Those people are called grandparents. I even heard of one single person who started a 529 plan for her future children, which were still just the proverbial gleam in her eye (not such a bad idea as the 529 fund could be used for her own further education).

Bottom line, earlier is better but it’s never too late. As we all know, the longer that funds are invested, the more time they have to grow. The longer the time horizon, the more potential there is to invest in stocks and other equities, which historically have a better return (but only over long periods). A few thousand dollars invested during a child’s early years can grow to a pretty impressive sum by college. For example, only $2,000 invested once and held for 18 years, 8% return, could grow to nearly $8,000 by the time the child goes to college. Now, $8,000 isn’t going to pay tuition at Stanford, but my guess is you wouldn’t turn it down, either. Same interest, same payment, but do it every year for 18 years and you’d potentially have nearly $75,000. At today’s prices, that’s a pretty nice sum to have socked away.

Really, if you think your child might be headed to an elite private school (and who doesn’t look at their infant and think he or she is a genius?), you’ll probably need more than $2,000 per year. But, some people get so intimidated by the vast price tags currently hanging off of diplomas that they never start at all. Saving something, even a little, but starting early and doing it consistently is almost always the best policy, whether for college, retirement, or any future goal. One caveat: pay attention to fees. There are plenty of “college planners” who work on commission and will sell you all kinds of wonder-investments for a heavy commission. It’ll be wrapped into the investment so you’ll never know what hit you. Even in 529 plans, some plans charge WAAYYYY more fees than others, and this can really eat your returns.

Okay, you haven’t done it and now your kid is in high school. It’s true you don’t have all that much time to save, but it’s still worth a run. You’re probably making more now than you were when Junior was an infant, and you have a better idea of whether you might qualify for financial aid. Now’s the time to take a look at how your investments and assets are distributed, and whether there’s the potential to shift some of them to qualify you for aid (if eligible or borderline) or explore tax strategies to produce a “tax scholarship” if it’s clear you won’t be eligible. Also, Roth and traditional IRAs (for you or the child) might be considered as another potential source of investing for college. Don’t forget Roths need to be invested for 5 years before tax free withdrawals on the gains, and might be reserved for later years of college or grad school.

Try not to wait until junior year—that’s the “look-back” year and you’re going to have to scramble if you want to use asset-moving or tax strategies. Whatever your picture is when you file the FAFSA (the day of) is what will be assessed for financial aid. It’s not too late for some strategies, but you’re going to need to get a move on.

If you’re the ultimate procrastinator and have waited until AFTER the financial aid awards were announced ‘round about May, well, there’s always next year. Next year, with a better plan. Maybe it’s time to call your friendly financial planner? I look forward to working with you…

College financial aid planning—maybe you don’t need us!

Do you do your own taxes? Yes? Then you have pretty good records and can lay your hands on all your financial information. You’ve got plenty of experience in working through financial forms. So, you probably can complete college financial aid applications on your own. The Free Application for Federal Student Aid (10 pages) is available at, and there’s a ton of information, FAQs, and brochures available on the site to help you. In fact, they have a special warning on the site not to allow yourself to be fleeced by unscrupulous “financial advisors”. Similarly, if your student’s college uses the CSS/Profile, it’s available online at If you can make it through the FAFSA, you can probably do the Profile, too.

Every year I, too, think about doing my own taxes. Cheapskate that I am, I think about what else I could be doing with several hundred dollars (okay, it’s waving at 4 figures now). But then the questions start to come up—how should I treat this? Should this be on Schedule A or could I put it on Schedule C? Most important, did I miss anything that could have saved me money? And all those changes from last year…Pretty soon, even though I’m pretty savvy about this stuff and my bookkeeping and records are well organized, I conclude that I do need an accountant who will do, expertly, accurately, and in a short time what will take me a long weekend to do ineptly and inaccurately.

I never want an accountant who cheats or does anything that might come under the heading of funny business. Thankfully, I’ve never had an audit and I don’t expect to have one, but if I ever do, I plan to go into it confident that everything I did was on the up and up. However, I do want my accountant to take me up to the legal limit—to get me every break I’m entitled to. That’s my philosophy on college financial aid, too.

Good college financial planning takes you up to the legal limit. (And it is a LEGAL limit—the feds can prosecute you for fraud on the FAFSA just as they can on your income taxes.) There is nothing illegal about restructuring your assets, paying off debt, or running your business in such a way as to maximize your eligibility or take advantage of legal tax strategies. Of course we should pay our fair share, but I don’t think we are obligated to subsidize others by our ignorance.

So, go ahead and take a crack at the FAFSA. It’ll get you started and you’ll have a lot better idea of what questions to ask. You know where to find us.

College financial planning: two different paths

How can you follow a map if you don’t know which road to take? College financial planning is like that. The destination is lowest possible out of pocket costs. But the route to take depends on where you’re starting from.

The key question you need to answer is whether or not you might be eligible for financial aid. I gave you a method for a very imprecise estimate in my previous post. Another way to try this out is to use one or both of these website estimators: FAFSA4caster for calculating your Expected Family Contribution and Princeton’s estimator for guessing at what a top private school might award your family.

Once you do that, you’ll have some idea of where you are: eligible, borderline, or dream-on. If you are eligible, then your strategy should be to search for ways to make your family MORE eligible for the good stuff: grants or scholarships that don’t have to be repaid; work-study; and lowest-possible interest loans.

Ditto if you’re borderline. This is perhaps the most nerve wracking position to be in because you just might be able to lower the treatment of your income and assets by reordering and tweaking the way you are holding and receiving them. Is this ethical? Well, most people (and the tax courts) have taken the position that citizens are entitled to order their affairs to pay the minimum income taxes possible under the law. I think the same standard applies to student aid.

What about if, clearly, you are wealthy enough to pay for your kid’s ticket? Well, first, congratulations. I always think about how happy I would be to pay a million bucks in income tax—after all, it would mean my take home would be (ahem!) a lot higher than it is now. I think any parent who can easily afford the tab should take some enjoyment in their success. However, nobody likes to be rooked or pay retail, and there are still plenty of strategies to reduce your out of pocket costs. These are mainly what planners refer to as “tax strategies”—ways to transfer some portion of your income to your student, both to take advantage of the student’s presumably lower tax rate, and to provide legitimate deductions for your business. Then, they use this money to pay the bills. Also, this is an area where having a student with get-up-and-go can really help—the kid who garners AP credit, outside scholarships, and earns money in side and summer jobs can make a big contribution here without fear of reducing school-granted aid.

None of this is easy, and all of it is highly individual based on family circumstances, to what school the student is headed and what their policies are, and how much effort the family wants or needs to devote to the process. That’s what college financial planning is all about.