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.