Managing College Expenses

Every stage of life has its own financial needs and concerns. The life events on this page can help you target the key financial strategies and issues that are likely to be most important to you in this stage of your life.

Finding Money to Pay College Bills Out of Pocket

Finding Money to PayCollege Bills Out of Pocket

You’ve saved for your child’s college education through the years, helped your child research schools, and supervised the application process. Now, thankfully, your child is in college. But you probably can’t disappear just yet — there are still bills to pay. Maybe you underestimated exactly how much financial aid would cover. Or perhaps you knew all along that you’d have to use some of your own resources or take out more loans. In any case, you’ll need to come up with some money soon. So where should you look?

Your paycheck

If you can afford it, applying part of your paycheck to your child’s college bills is probably the easiest route. You won’t have any paperwork to fill out or messy calculations at tax time, and you can leave your retirement accounts and life insurance intact.

Most colleges bill once each semester. To have enough money saved to meet each semester’s bill, consider setting aside an amount from each paycheck as soon as you get it, rather than saving whatever is left at the end of the month. As you accumulate money, you should put it somewhere safe (e.g., a savings account, money market account, or certificate of deposit) because of your short time frame. Some colleges, however, offer quarterly or monthly bills in an effort to make payment easier for you. Colleges may even offer you a tuition discount if you allow them to debit your account directly. In addition, some private companies now offer a 10-month payment plan coordinated with individual colleges.

The main drawback to using your paycheck as a source of cash for college bills is that this consistent outflow of cash over a period of months or years may leave you financially strapped to invest for other goals. To determine how much of a contribution you can manage (if any), you’ll need to prepare a detailed budget of your household income and expenses.

Your savings and investments

The next logical place to look for spare funds is your savings and investments. This category encompasses everything from savings accounts and money market accounts to stocks, mutual funds, and real estate holdings. Not surprisingly, it can be difficult to figure out which source to use. Generally speaking, withdrawing from your savings accounts is the easier route. Again, no applications or independent approvals are necessary (except perhaps from your spouse!). Also, no tax penalties are associated with such withdrawals. And the fact that savings accounts generally earn the lowest rates of return means that you don’t have to worry about missing out on high returns. However, try to keep at least three to six months’ worth of savings on hand for emergencies.

The process is a bit more complicated with investments. Though most investments are easily liquidated (i.e., converted to cash), it’s not always easy to know which ones to liquidate. The answer depends in part on each investment’s rate of return, future prospects, and potential capital gain (or loss) if sold and the tax consequences. If you’re unsure which investments to liquidate, a professional financial planner can help you sort through the possibilities.

If you have a 529 savings plan or a 529 prepaid tuition plan, you’ll need to notify the plan administrator before you make a withdrawal. Check the specific rules of your plan for more information. If you have a Coverdell education savings account, keep in mind that all withdrawals must be made before the beneficiary reaches age 30 (unless the beneficiary has special needs).

Your home

If you’re one of the lucky ones whose home has increased in value over the years, you can usually tap this equity for college bills by taking out a home equity loan. The loan can be structured as either a revolving line of credit (you’re approved for a certain amount and you tap the funds periodically as you need them) or a second mortgage (you receive one lump sum). The main advantage of a home equity loan is that interest payments are usually tax deductible. And because your home serves as collateral for the loan, the interest rate is likely to be lower than on an unsecured loan. However, because the loan is now tied to your house, your lender can foreclose on your home if you default.

Your life insurance

If you have a cash value life insurance policy, you might decide to use part of the cash value that has built up inside the policy by making a withdrawal or taking out a loan, or using some combination of the two. For withdrawals, the amount that you withdraw is generally limited to a percentage of your cash value and varies by policy and company. The main drawback is that such withdrawals decrease your death benefit (i.e., the sum of cash that the insurance company pays at your death). For policy loans, you are likewise allowed to borrow up to a specified percentage of your cash value. However, if you die with an outstanding loan against your policy, your death benefit is reduced by the amount of the outstanding loan and interest. For more information, contact your insurance agent.

Private loan/PLUS Loan

If the idea of putting your home at risk with a home equity loan scares you, then you might consider obtaining a personal (unsecured) loan from a private financial institution. To get approved, you’ll likely need a good credit history.

If you’re looking for a loan that’s college-specific, the federal government’s Parent PLUS Loan may be a good option. Under this program, parents can borrow up to the full cost of their child’s college education, less any financial aid received. The loan is obtained directly from the federal government. Importantly, PLUS Loans aren’t based on your child’s financial need. However, you’ll need to pass a credit check.

Your retirement plans

By the time your child’s in college, it’s likely that you’ll have at least some money saved in one or more retirement accounts, such as an IRA or an employer-sponsored plan like a 401(k). Should you tap these funds? As a general rule, most planners don’t recommend using your retirement funds to pay college bills. You’ll need the money in retirement, and you’ll miss out on the growth that would have occurred had you not withdrawn the money.

However, there may be instances where you need (or want) to use your retirement funds. With IRAs (traditional IRAs and Roth IRAs), you can withdraw funds at any age, penalty free, to pay your child’s college bills (“qualified higher education expenses,” as the IRS likes to call them). However, you may owe income tax on your withdrawals; consult the appropriate IRS publication on your type of IRA, or speak with a tax professional. Be aware that once you withdraw the money, it can’t be paid back like a loan.

Unfortunately, if you withdraw funds from an employer-sponsored retirement plan like a 401(k) or 403(b) and you’re under age 59½, you’ll pay a 10 percent early withdrawal penalty. Keep in mind, too, that all withdrawals will be added to your taxable income for the year. Instead of withdrawing funds, another option is to borrow the money, assuming your company’s plan allows it (check with your human resources manager). By borrowing instead of withdrawing, you avoid taxes and penalties. However, most plans require you to pay back the entire loan within five years (you can start to repay right away through a payroll deduction) or immediately if you leave the company.

Your child’s savings

In finding spare change for college bills, leave no stone unturned. Does your child have any income or assets that could be used? Earnings from a part-time or summer job? What about that vintage lunch box collection collecting dust in your child’s closet, or those $100 savings bonds that your child receives from Aunt Agnes every year? By contributing even a portion of the cost, your child is likely to feel more invested in his or her education.

Sticker Shock: Creative Ways to Lower the Cost of College

Sticker Shock: Creative Ways to Lower the Cost of College

Even with all of your savvy college shopping and research about financial aid, college costs may still be prohibitive. At these prices, you expect you’ll need to make substantial financial sacrifices to send your child to college. Or maybe your child won’t be able to attend the college of his or her choice at all. Before you throw in the towel, though, you and your child should consider steps that can actually lower college costs. Although some of these ideas deviate from the typical four-year college experience, they just might be your child’s ticket to college — and your ticket to financial sanity.

Ask about tuition discounts and flexible repayment programs

Before you rule out a college completely, ask whether it offers any tuition discounts or flexible repayment programs. For example, the school may offer a discount if you pay the entire semester’s bill up front, or if you allow the money to be directly debited from your bank account. The college may also allow you to spread your payments over 12 months or extend them for a period after your child graduates. And if it’s your alma mater, don’t forget to inquire about any discounts for the children of alumni. Finally, ask if some charges are optional (e.g., full meal plan versus limited meal plan).

Graduate in three years instead of four

Some colleges offer accelerated programs that allow your child to graduate in three years instead of four. This can save you a whole year’s worth of tuition and related expenses. Some colleges offer a similar program that combines an undergraduate/graduate degree in five years. The main drawback is that your child will have to take a heavier course load each semester and may have to forgo summer breaks to meet his or her academic obligations. Also, some educators believe that students need four years of college to develop to their fullest potential — intellectually, emotionally, and occupationally.

Earn college credit in high school

By taking advanced placement courses or special academic exams, your child may be able to earn college credits while still in high school. This means that your child may be able to take fewer classes in college, saving you money.

Think about cooperative education

Cooperative (co-op) education is a type of education where semesters of course work alternate with semesters of paid work at internships that your child helps select. Although a co-op degree usually takes five years to obtain, your child will be earning money during these years that can be used for tuition costs. In addition, your child gains valuable job experience.

Enroll in a community college, then transfer to a four-year college

One surefire way to cut college costs is to have your child enroll in a local community college for a couple of years, where costs are often substantially less than four-year institutions. Then, after two years, your child can transfer to a four-year institution. Your child’s diploma will be from the four-year institution, but your expenses won’t. Before choosing this route, though, make sure that any credits your child earns at the community college will be transferable to another institution.

Defer enrollment for a year

Your child might be aching to get to college, but taking a year off, commonly referred to as a “gap year,” can give you both some financial breathing room and allow your child to work and save money for a full year before starting college. Your child will apply under the college’s normal application deadline with the rest of his or her classmates and, once accepted, can ask for a one-year deferment. But make sure the college offers deferred enrollment before your child goes through the time and expense of applying.

Live at home

It’s not every child’s dream, but attending a nearby college and living at home, even for a year or two, can substantially reduce costs by eliminating room-and-board expenses (though your child will incur commuting costs). This arrangement may work out best at a college that has a student commuter population, because the college is likely to try to meet these students’ needs. If your child does live at home, you’ll both need to sit down beforehand and discuss mutual expectations. For example, now that your child’s in college, it’s not realistic to expect him or her to adhere to a rigid weekend curfew.

Research online learning options

Taking courses online is a trend that’s here to stay, and many colleges are in the process of creating or expanding their opportunities for online learning. Your child might be able to take a year’s worth of classes from home and then attend the same school in person for the remaining years.

Work part-time throughout the college years

Part-time work during college can help your child defray some costs, though working during school can be both a physical and emotional strain. To make sure that your child’s academic work doesn’t suffer, one option might be for your child to focus on school the first year and then obtain a part-time job in the remaining years. In addition, encouraging your child to become an RA (resident assistant) at college could earn them free room and board.

Join the military

There are several options here. Under the Reserve Officers’ Training Corps (ROTC) scholarship program, your child can receive a free college education in exchange for a required period of active duty following graduation. Your child can apply for an ROTC scholarship at a military recruiting office during his or her junior or senior year of high school. Or, your child can serve in the military and then attend college under the GI Bill. Your child can also attend a service academy, like the U.S. Military Academy at West Point, for free. Be aware, though, that these schools are among the most competitive in the country, and your child must serve a minimum number of years of active duty upon graduation. For more information, visit your local military recruiting office, or speak to your child’s high school guidance counselor.

Go to school abroad

Foreign schools generally offer an excellent education at a price comparable to that of an average four-year public college in the United States. And in the global economy, many employers tend to look favorably on studying abroad. Your child will even be eligible for need-based federal student loans (but not grants), as well as the two federal education tax credits — the American Opportunity credit and the Lifetime Learning credit.

Look for employer educational assistance

Does your employer offer any educational benefits for the children of its employees, like partial tuition reimbursement or company scholarships? Check with your human resources manager.

Have grandparents pay tuition directly to the college

Payments that grandparents (or others) make directly to a college aren’t considered gifts for purposes of the federal gift tax rules. So, grandparents can be as generous as they want without having to worry about the tax implications for themselves. Keep in mind, though, that any payments must go directly to the college. They can’t be delivered to your child with instructions to apply them to the college bills.

Tapping the Equity in Your Home

Tapping the Equity in Your Home

Over time, the value of your home has grown and your mortgage balance has been reduced (or even eliminated). The equity (the property’s value minus any liens against it) you now have in your home is a reservoir of funding potential. You may decide to tap into it for various purposes, such as remodeling your home, paying off high-interest loans or credit card debt, buying a car, or sending your child to college.

The pros and consHome equity financing (which may be set up as either a loan or a line of credit) is secured by the equity you’ve built up in your home. This type of financing has several advantages compared to other forms of personal loans:

  • Higher borrowing limits
  • Favorable interest rates
  • Tax-deductible interest–if you itemize your deductions on your federal income tax return, you may be able to deduct the interest on up to $100,000 ($50,000 if married filing separately) of home equity debt.

There can be drawbacks, however:

  • You may have to pay closing costs and other fees
  • If you sell your home, you’ll have to repay the outstanding balance
  • Since your home is collateral securing the debt, you run the risk of foreclosure if you can’t make your payments

Home equity loansOften referred to as a second mortgage, a home equity loan generally allows you to borrow a fixed amount of money (typically up to 80 percent of your equity) at a fixed rate of interest. The total amount you borrow is advanced to you when you sign for the loan. You’ll repay the loan with equal monthly payments over a fixed term.

Home equity lines of creditWhen you arrange a home equity line of credit, your lender establishes a revolving credit limit determined in part by the amount of your equity. You then borrow only what you need (up to the maximum allowed) only when you need it (subject to any time limit on the borrowing period). You can access the funds either by writing a check or using a credit card associated with the account.

The interest rate for a home equity line of credit is generally a variable rate tied to an index. Your monthly payments may vary, depending on your outstanding balance and the prevailing interest rate. You may have the option of making interest-only payments over the course of the repayment period (e.g., 10 years), or minimum payments that cover a portion of the principal plus accrued interest, coupled with a balloon payment of principal at the end of the loan’s term.

Choosing between the twoWhen deciding whether to apply for a home equity loan or a line of credit, it’s important to consider how much you’ll need and how soon you’ll need it.

If you want a fixed amount of money for a specific purpose (e.g., remodeling the kitchen), you may wish to take out a home equity loan that advances you the total amount up front. If instead you’ll need an indeterminate amount over a few years (e.g., funds for ongoing college expenses), you may benefit most from a home equity line of credit that you can draw on when needed.

Shop around for the best dealWhatever choice you make, you’ll want to shop around to find the most favorable rates and terms. Here are a few things to consider:

  • In an effort to attract your business, a lender may be willing to absorb or waive some or all of the costs (e.g., application fees and points) of obtaining the financing
  • The frequency of variable interest rate adjustments and any caps on rate increases will affect the overall cost of a home equity line of credit
  • If you’re considering a home equity line of credit, find out if you have the option to convert the line to a fixed-rate, fixed-term loan in the future
  • When comparing a home equity line of credit to a home equity loan, don’t rely solely on the annual percentage rate (APR) as a measure of cost, because the APR for a home equity loan takes points and financing charges into consideration while the APR for a home equity line of credit does not

ABCs of Financial Aid

ABCs of Financial Aid

It’s hard to talk about college without mentioning financial aid. Yet this pairing isn’t a marriage of love, but one of necessity. In many cases, financial aid may be the deciding factor in whether your child attends the college of his or her choice. That’s why it’s important to develop a basic understanding of financial aid before your child applies to college. Without such knowledge, you may have trouble understanding the process of aid determination, filling out the proper aid applications, and comparing the financial aid awards that your child may receive.

But let’s face it. Financial aid information is probably not on anyone’s top ten list of bedtime reading material. It can be an intimidating and confusing topic. There are different types, different sources, and different formulas for evaluating your child’s eligibility. Here are some of the basics to help you get started.

What is financial aid?

Financial aid is money distributed primarily by the federal government and colleges in the form of loans, grants, scholarships, or work-study jobs. A student can receive both federal and college aid. An ideal financial aid package will contain more grants and scholarships (which don’t need to be repaid) and fewer loans.

Financial aid can be further broken down into two categories: need-based aid, which is based on a student’s financial need, and merit aid, which is based on a student’s academic, athletic, musical, or artistic talent. Both the federal government and colleges provide need-based aid in the form of loans and grants. For merit aid, colleges are the main source, and they often use favorable merit aid packages to attract the best and brightest students to their campuses.

It’s worth noting that colleges can vary significantly in their generosity when it comes to merit aid; merit awards are typically related to the size of a college’s endowment and its unique objectives. College guidebooks and marketing materials generally provide statistics on the size of a college’s average aid award (both in dollar amounts and as a percentage of the typical aid package) and the family income thresholds necessary for different aid amounts. If you’re a family researching college choices, you can help your bottom line by targeting colleges that offer significant merit aid packages. For example, some colleges have made it a policy to replace loans with grants in their financial aid packages.

In addition to colleges, many businesses, foundations, and associations offer smaller merit scholarships with specific eligibility criteria and deadlines. Various scholarship websites allow your child to input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships.

How is my child’s financial need determined?

Financial need is generally determined by looking at a family’s income, assets, and household information. The federal government uses the FAFSA, which stands for Free Application for Federal Student Aid; colleges generally use the PROFILE form, or their own institutional form. The FAFSA uses a formula known as the federal methodology; the PROFILE uses a formula known as the institutional methodology. The general process of aid assessment is called needs analysis.

Under the FAFSA, your current income and assets and your child’s current income and assets are run through a formula. You are allowed certain deductions and allowances against your income, and you’re able to exclude certain assets from consideration. The result is a figure known as the expected family contribution, or EFC. It’s the amount of money that you’ll be expected to contribute to college costs before you are eligible for aid.

A detailed analysis of the formula is beyond the scope of this article, but generally here’s how it works: (1) parent income is counted up to 47% (income equals adjusted gross income or AGI plus untaxed income/benefits minus certain deductions); (2) student income is counted at 50% over a certain amount ($6,570 for the 2018/2019 school year); (3) parent assets are counted at 5.6% (home equity, retirement assets, cash value life insurance, and annuities are excluded); and (4) student assets are counted at 20%.

Your EFC remains constant, no matter which college your child applies to. An important point: Your EFC is not the same as your child’s financial need. To calculate your child’s financial need, subtract your EFC from the cost of attendance at your child’s college. Because colleges aren’t all the same price, your child’s financial need will fluctuate with the cost of a particular college.

For example, you fill out the FAFSA, and your EFC is calculated to be $25,000. Assuming that the cost of attendance at College A is $65,000 per year and the cost at College B is $35,000, your child’s financial need is $40,000 at College A and $10,000 at College B.

The PROFILE application basically works the same way. However, the PROFILE generally takes a more thorough look at your income and assets to determine what you can really afford to pay (for example, the PROFILE looks at your home equity and money you may have contributed to medical and dependent care flexible spending accounts).

What factors count the most in needs analysis? Your current income is the most important factor, but other criteria play a role, such as your total assets, the number of children you’ll have in college at the same time, and how close you are to retirement age.

Estimating aid eligibility ahead of time

Getting a ballpark estimate of financial aid ahead of time can be very helpful for planning purposes. There are two ways you can do this.

First, the federal government offers an online tool called the “FAFSA4caster” that you can complete to get an estimate of your EFC. Second, every college offers a tool called a “net price calculator” on its website that you can complete to get an estimate of how much financial aid your child might be eligible for at that particular college based on your family’s financial and personal profile.

Submitting financial aid applications

The best way to complete the FAFSA is to fill it out and submit it online (it can also be completed manually and mailed to the address listed on the form). The online route is more efficient because mistakes are flagged immediately and electronic FAFSAs take only one week to process (compared to two to four weeks for paper FAFSAs). In order to complete the FAFSA online, you and your child will first need to obtain an FSA ID, which you can also do online.

The FAFSA relies on income tax information from two years prior (for example, the 2018/19 FAFSA relies on your 2016 tax return) and current asset information. The FAFSA has the ability to directly import your tax information using the IRS Retrieval Tool, which is built into the form, though you will also need to answer additional questions. The FAFSA can be filed as early as October 1st in the year prior to the year your child will be attending school.

The PROFILE (or individual college application) is usually submitted in late fall or winter but is typically required earlier if your child is applying to college early decision or early action. The specific deadline is left up to the individual college, so make sure to keep track of all college deadlines. In addition to the form itself, the CSS Profile will typically require you to submit tax returns, and possibly other financial documents, at a later date. If so, you’ll receive instructions on how to do this.

After your FAFSA is processed, your child will receive a Student Aid Report highlighting your EFC; the colleges that you list on the FAFSA will also get a copy of the report. When your child is accepted at a college, the college’s financial aid administrator will attempt to craft an aid package to help meet your child’s financial need. This is done using a combination of the following (typically in this order):

  • Federal Pell Grant (for students with exceptional financial need)
  • Federal Direct Stafford Loan (subsidized for students with financial need)
  • Federal Direct Stafford Loan (unsubsidized for all other students)
  • Federal Perkins Loan, Supplemental Educational Opportunity Grant (SEOG), and work-study (funds for these programs are allocated to colleges by the federal government for distribution to students; whether a student receives any of these funds depends on timing of application, financial need, and availability of funds)
  • College grant, scholarship, or tuition discount (at the college’s discretion)

Keep in mind that colleges aren’t obligated to meet all of your child’s financial need. In fact, it’s not uncommon for colleges to meet only a portion of a student’s need, a phenomenon known as getting “gapped.” If this happens to you, you’ll have to make up the shortfall, in addition to paying your EFC. On the flip side, if a college says it is meeting “100% of your demonstrated need” keep in mind that the college is the one who determines your need, not you, and that you’ll still have to pay your EFC.

Comparing aid awards

In late winter or early spring, your child will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering. When comparing aid awards, read each award letter carefully and make sure you understand exactly what the college is offering. The goal is to compare your out-of-pocket cost at each college. To do this, look at the total cost of attendance for each college and subtract any grant or scholarship aid the college is offering. If the grant or scholarship is merit-based, find out if it’s guaranteed for each year your child is in college and what requirements must be met in order to qualify for it annually. If the grant or scholarship is need-based, find out whether you can expect a similar amount each year as long as your income and assets stay roughly the same (and you have the same number of children in college), and ask the aid office whether it increases to keep up with annual increases in tuition, fees, and room and board.

The difference between the total cost and any grant or scholarship aid is your out-of-pocket cost or “net price.” Compare this figure across all colleges. Once you determine your out-of-pocket cost at each college, determine how much, if anything, you or your child will need to borrow. Then multiply this figure by four to get an idea of what your total borrowing costs might be. Armed with this information, you’ll be in a position to make the best financial decision for your family.

If you’d like to lobby a particular school for more aid, tread carefully. A polite letter to the financial aid administrator followed up by a telephone call is appropriate. Your chances of getting more aid are best if you can document a change in circumstances that affects your ability to pay, such as a recent job loss, unusually high medical bills, or some other event that impacts your finances. Your chances of getting more aid by asking one college if they’ll match a favorable aid offer from another college is a less reliable strategy, but may be worth a shot if the colleges are direct competitors.

How much should our family rely on financial aid?

With all this talk of financial aid, it’s easy to assume that it will do most of the heavy lifting when it comes time to pay the college bills. But the reality is you shouldn’t rely too heavily on financial aid. Although aid can certainly help cover your child’s college costs, student loans often make up the largest percentage of the typical aid package, not grants and scholarships. Remember, parents and students who rely mainly on loans to finance college can end up with a considerable debt burden that can have negative financial implications for years after graduation.

529 Plans and Financial Aid Eligibility

529 Plans and Financial Aid Eligibility

If you’re thinking about opening a 529 account, or if you’ve already opened one, you might be wondering how 529 funds will affect your child’s financial aid eligibility.

A general word about financial aidThe financial aid process is all about assessing what a family can afford to pay for college and trying to fill the gap. To do this, the federal government and colleges examine a family’s income and assets to determine how much a family should be expected to contribute before receiving financial aid. Financial aid formulas weigh assets differently, depending on whether they are owned by the parent or the child. So, it’s important to know how your 529 account will be classified, because this will affect the amount of your child’s financial aid award.

Financial aid can consist of loans (which must be repaid in the future), grants or scholarships, and/or a work-study job. The typical financial aid package contains all of these types of aid. There are no guarantees that a larger financial aid award will consist of favorable grants and scholarships — your child may simply get more loans.

The two main sources of financial aid are the federal government and colleges. In determining a student’s financial need, the federal government uses a formula known as the federal methodology, while colleges use a formula known as the institutional methodology. The treatment of 529 accounts may differ, depending on the formula used.

How is financial need determined?Though the federal government and colleges use different formulas to assess financial need, the basic process is the same. You and your child fill out a financial aid application by listing your current assets, income, and personal family information (exactly what assets must be listed will depend on the formula used). The federal application is called the FAFSA, which stands for Free Application for Federal Student Aid; colleges generally use an application known as the CSS Profile.

Your family’s asset and income information is run through a specific formula to determine your expected family contribution, or EFC. Your EFC represents the amount of money that your family is considered to have available to put toward college costs for that year. The federal government uses its EFC figure in distributing federal aid; colleges uses their own EFC figure when distributing their own institutional aid.

The difference between your EFC and the cost of attendance (COA) at your child’s college equals your child’s financial need. The COA generally includes billed costs for tuition, fees, room and board and a designated sum for non-billed costs for books, transportation, and personal expenses. It’s important to remember that the amount of your child’s financial need will vary, depending on the cost of a particular school.

The results of your FAFSA are sent to every college that your child applies to. Every college that accepts your child will then attempt to craft a financial aid package to meet your child’s financial need. In addition to the federal EFC figure, colleges that use the CSS Profile form will have that EFC figure too. Eventually, the financial aid administrator will create an aid package made up of loans, grants, scholarships, and/or a work-study job. Some of the aid will be from federal programs and the rest will be from the college’s own funds. Keep in mind that colleges aren’t obligated to meet all of your child’s financial need. If they don’t, you’re responsible for the shortfall.

The financial aid treatment of 529 plansNow let’s see how a 529 account affects federal financial aid.

Under the federal methodology, 529 plans — both savings plans and prepaid tuition plans — are considered an asset of the parent if the parent is the account owner. In this case, the value of the account is listed as an asset on the FAFSA. Under the federal formula, a parent’s assets are assessed (counted) at a rate of no more than 5.6%. This means that every year, the federal government treats 5.6% of a parent’s assets as available to help pay college costs. (By contrast, student assets are assessed at a rate of 20%.)

There are a few points to keep in mind regarding the classification of 529 plans as a parent asset:

  • A parent is required to list a 529 plan as an asset only if he or she is the account owner of the plan. If a grandparent is the account owner, then the 529 plan doesn’t need to be listed as an asset on the FAFSA (this doesn’t seem fair, but grandparent-owned 529 accounts are counted in a different way, discussed below.)
  • Any student-owned or UTMA/UGMA-owned 529 account is also reported as a parent asset if the student files the FAFSA as a dependent student. A 529 account is considered an UTMA/UGMA-owned account when UTMA/UGMA assets are transferred to a 529 account on behalf of the same beneficiary.
  • If your adjusted gross income is less than $50,000 and you meet a few other requirements, the federal government doesn’t count any of your assets in determining your EFC. So your 529 account wouldn’t affect your child’s financial aid eligibility at all.

Withdrawals from a parent-owned 529 account that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income on the FAFSA the following year.

Now, what about grandparent-owned 529 accounts? Grandparent-owned accounts are not listed as an asset on the FAFSA. However, withdrawals from a grandparent-owned 529 account are counted as student income on the FAFSA the following year. Student income is assessed at 50%, which means that a student’s eligibility for financial aid could decrease by 50% in the year following the withdrawal. As a result, grandparents may want to wait until the spring of their grandchild’s junior year of college to make a withdrawal if they are concerned about the potential impact on financial aid.

Regarding the institutional methodology, 529 plans are generally treated the same as under the federal methodology. But check with your child’s individual college for more information.

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer’s official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

Education Tax Credits

Education Tax Credits

It’s tax time, and your kitchen table is littered with papers and forms. As if this isn’t bad enough, you recently paid your child’s college semester bill, and you don’t know where you’ll find the money to pay the taxes that you expect to owe. Well, you might finally catch a break. Now that your child is in college, you might qualify for one of two education tax credits — the American Opportunity credit and the Lifetime Learning credit. And because a tax credit is a dollar-for-dollar reduction against taxes owed, it’s more favorable than a tax deduction, which simply reduces the total income on which your tax is based.

American Opportunity credit

The American Opportunity credit is a tax credit that covers the first four years of your, your spouse’s or your child’s undergraduate education. Graduate and professional courses aren’t eligible. The credit is worth a maximum of $2,500. It’s calculated as 100% of the first $2,000 of tuition and related expenses that you’ve paid for the year, plus 25% of the next $2,000 of such expenses.

To take the credit, both you and your child must clear some hurdles:

  • To qualify for the maximum American Opportunity credit in 2018, your MAGI must be below $80,000 if you’re a single filer and $160,000 if you’re a joint filer. A partial credit is available for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.
  • Your child must attend an eligible educational institution as defined by the IRS (generally, any post-secondary school that offers a degree program and is eligible to participate in federal aid programs qualifies).
  • Your child must attend college on at least a half-time basis.
  • Your child can’t have a felony conviction.
  • You must claim your child as a dependent on your tax return. If your child has paid the tuition expenses, you can still take the credit as long as you claim your child as a dependent on your return. But if your child has paid the tuition expenses and isn’t claimed as a dependent on your return, your child can take the credit on his or her own return.

The American Opportunity credit can be taken for more than one student in the same year, provided each student qualifies independently. So, if you have twins who are in their freshman year of college (and you otherwise meet the requirements), your credit would be worth $5,000.

However, there are other restrictions. You can’t take both the American Opportunity credit and the Lifetime Learning credit in the same year for the same student. And whatever education expenses you cover with a tax-free distribution from your 529 plan or Coverdell education savings account can’t be the same expenses you use to qualify for the American Opportunity credit.

Lifetime Learning credit

The Lifetime Learning credit is a tax credit for the qualified education expenses that you, your spouse, or your child incur for courses taken to improve or acquire job skills (even courses related to sports, games, or hobbies qualify if they meet this requirement!). The Lifetime Learning credit is less restrictive than the American Opportunity credit. In addition to college expenses, the Lifetime Learning credit covers the tuition expenses of graduate students and students enrolled less than half-time.

The Lifetime Learning credit is generally worth a maximum of $2,000. It’s calculated as 20% of the first $10,000 of tuition and related expenses that you’ve paid for the year.

One major difference between the American Opportunity credit and the Lifetime Learning credit is that the Lifetime Learning credit is generally limited to a total of $2,000 per tax return, regardless of the number of students in a family who may qualify in a given year. So if you have twins who are in their senior year of college, your Lifetime Learning credit would be worth $2,000, not $4,000.

To qualify for the maximum Lifetime Learning credit in 2018, your MAGI must be below $57,000 if you’re a single filer and $114,000 if you’re a joint filer. A partial credit is available for single filers with a MAGI between $57,000 and $67,000 and joint filers with a MAGI between $114,000 and $134,000.

As with the American Opportunity credit, if you withdraw money from your 529 plan or Coverdell ESA in the same year that you claim the Lifetime Learning credit, your withdrawal cannot cover the same expenses that you use to qualify for the Lifetime Learning credit.

My child is in college–how do I know which credit to take?

The American Opportunity credit and the Lifetime Learning credit cannot be claimed in the same year for the same student, so you’ll need to pick one. Because the American Opportunity tax credit is available for all four years of undergraduate education, is worth more ($2,500 vs. $2,000), and the income limits to qualify are higher, that credit will probably be your first choice. But if your child is attending school less than half-time, the Lifetime Learning credit will be your only option (assuming you meet the income limits).

How do I claim either credit on my tax return?

Every year that you pay college tuition you should receive Form 1098-T from the college, showing the tuition expenses you’ve paid for the year. Then, at tax time, you must file Form 8863 to take either credit. If you are married, you must file a joint return to take either credit. For more information, see IRS Publication 970 or consult a tax professional.

Teaching Your College-Age Child about Money

Teaching Your College-Age Child about Money

When your child first started school, you doled out the change for milk and a snack on a daily basis. But now that your kindergartner has grown up, it’s time for you to make sure that your child has enough financial knowledge to manage money at college.

Lesson 1: Budgeting 101Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from a part-time job during high school. But now that your child is in college, he or she may need to draft a “real world” budget, especially if he or she lives off-campus and is responsible for paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:

  • Help your child figure out what income there will be (money from home, financial aid, a part-time job) and when it will be coming in (at the beginning of each semester, once a month, or every week).
  • Make sure your child understands the difference between needs and wants. For instance, when considering expenses, point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.
  • Determine together how you and your child will split responsibility for expenses. For instance, you may decide that you’ll pay for your child’s trips home, but that your child will need to pay for art supplies or other miscellaneous expenses.
  • Warn your child not to spend too much too soon, particularly when money that has to last all semester arrives at the beginning of a term. Too many evenings out in September eating surf and turf could lead to a December of too many evenings in eating cold cereal.
  • Acknowledge that college isn’t all about studying, but explain that splurging this week will mean scrimping next week. While you should include entertainment expenses in the budget, encourage your child to stick closely to the limit you agree upon.
  • Show your child how to track expenses by saving receipts and keeping an expense log. Knowing where the money is going will help your child stay on track. Reallocation of resources may sometimes be necessary, but help your child understand that spending more in one area means spending less in another.
  • Encourage your child to plan ahead for big expenses (the annual auto insurance bill or the trip over spring break) by instead setting aside money for them on a regular basis.
  • Caution your child to monitor spending patterns to avoid excessive spending, and ask him or her to come to you for advice at the first sign of financial trouble.

You should also help your child understand that a budget should remain flexible; as financial goals change, a budget must change to accommodate them. Still, your child’s ultimate goal is to make sure that what goes out is always less than what comes in.

Lesson 2: Opening a bank accountFor the sake of convenience, your child may want to open a checking account near the college; doing so may also reduce transaction fees (e.g. automated teller machine (ATM) fees). Ideally, a checking account should require no minimum balance and allow unlimited free checking; short of that, look for an account with these features:

  • A simple fee structure
  • ATM or debit card access to the account
  • Online or telephone access to account information
  • Overdraft protection

To avoid bouncing checks, it’s essential to keep accurate records, especially of ATM or debit card usage. Show your child how to balance a checkbook on a regular (monthly) basis. Most checking account statements provide instructions on how to do this.

Encourage your child to open a savings account too, especially if he or she has a part-time job during the school year or summer. Your child should save any income that doesn’t have to be put towards college expenses. After all, there is life after college, and while it may seem inconceivable to a college freshman, he or she may one day want to buy a new car or a home.

Lesson 3: Getting creditIf your child is age 21 or older, he or she may be able to independently obtain a credit card. But if your child is younger, the credit card company will require you, or another adult, to cosign the credit card application, unless your child can prove that he or she has the financial resources to repay the credit card debt. A credit card can provide security in a financial emergency and, if used properly, can help your child build a good credit history. But the temptation to use a credit card can be seductive, and it’s not uncommon for students to find themselves over their heads in debt before they’ve declared their majors. Unfortunately, a poor credit history can make it difficult for your child to rent an apartment, get a car loan, or even find a job for years after earning a degree. And if you’ve cosigned your child’s credit card application, you’ll be on the hook for your child’s unpaid credit card debt, and your own credit history could suffer.

Here are some tips to help your child learn to use credit responsibly:

  • Advise your child to get a credit card with a low credit limit to keep credit card balances down.
  • Explain to your child that a credit card isn’t an income supplement; what gets charged is what’s owed (and then some, given the high interest rates). If your child continually has trouble meeting expenses, he or she should review and revise the budget instead of pulling out the plastic.
  • Teach your child to review each credit card bill and make the payment by the due date. Otherwise, late fees may be charged, the interest rate may go up if the account falls 60 days past due, and your child’s credit history (or yours, if you’ve cosigned) may be damaged.
  • If your child can’t pay the bill in full each month, encourage him or her to pay as much as possible. An undergraduate student making only the minimum payments due each month on a credit card could finish a post-doctorate program before paying off the balance.
  • Make sure your child notifies the card issuer of any address changes so that he or she will continue to receive statements.
  • Tell your child that when it comes to creditors, students don’t get summers off! Your child will need to continue to make payments every month, and if there’s a credit card balance carried over from the school year, your child may want to use summer earnings to pay it off in order to start the next school year with a clean slate.

Finally, remind your child that life after college often involves student loan payments and maybe even car or mortgage payments. The less debt your child graduates with, the better off he or she will be. When it comes to the plastic variety, extra credit is the last thing a college student wants to accumulate!

Establishing a Budget

Establishing a Budget

Do you ever wonder where your money goes each month? Does it seem like you’re never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.

Examine your financial goals

Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses

To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget

Once you’ve added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you’re on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don’t worry! All it will take is some determination and a little self-discipline, and you’ll eventually get it right.

Monitor your budget

You’ll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don’t have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track

  • Involve the entire family: Agree on a budget up front and meet regularly to check your progress
  • Stay disciplined: Try to make budgeting a part of your daily routine
  • Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
  • Find a budgeting system that fits your needs (e.g., budgeting software)
  • Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
  • Build rewards into your budget (e.g., eat out every other week)
  • Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will continue to increase

Repaying Your Student Loans

Repaying Your Student Loans

You vaguely remember signing a form every year at college registration time. Now that you’ve graduated, it’s all become painfully clear — those forms were promissory notes detailing your student loan obligations. Your loans aren’t going away, and you’ll want to repay them as quickly as possible. So whether you have a small sum or a small fortune to pay off, it’s helpful to brush up on some student loan basics.

First, remember the grace period

After you graduate, you’ll probably have a lot to think about — deciding where to live, finding a job, renting an apartment. Fortunately, you don’t have to add student loans to your list, at least not right away. Thanks to the grace period built into most student loans, you’ll likely get anywhere from six to nine months before you need to start repaying your loans. This gives you some breathing room to get financially settled.

Understand your repayment options

Gone are the days when your only repayment option consisted of fixed, equal payments spread over a 10-year term. Though this is certainly one option — and typically the fastest way to pay off your loans — it’s not the only option. Because of the growing number of students who require student loans to finance their education and the ever increasing amount of their debt, the federal government offers several flexible repayment plans to help students manage this large financial responsibility. (Private student lenders may or may not offer the following plans — check with your lender.)

  • Standard repayment plan: This is the original repayment plan. With a standard plan, you generally pay a fixed amount each month for up to 10 years.
  • Graduated repayment plan: With a graduated plan, your payments start out low in the early years of the loan but increase in later years (the term is still 10 years). This plan is tailored to individuals with relatively low current incomes (e.g., recent college graduates) who expect their incomes to increase in the future. However, you’ll ultimately pay more for your loan than you would under the standard plan, because more interest accumulates in the early years of the plan when your outstanding loan balance is higher.
  • Extended repayment plan: With an extended plan, you extend the time you have to repay your loan, usually from 12 to 30 years, depending on the loan amount. Your fixed monthly payment is lower than it would be under the standard plan, but again, you’ll ultimately pay more for your loan because of the interest that accumulates under the longer repayment period. Note: Many lenders allow you to combine an extended plan with a graduated plan.
  • Income-based repayment plan: With an income-based repayment (IBR) plan, your monthly loan payment is based on your annual discretionary income. The federal government offers a PAYE plan (Pay As You Earn) and a REPAYE plan (Revised Pay as You Earn). Generally, undergraduate borrowers who qualify will pay 10% of their discretionary income toward their student loans each month, and after 20 years of on time payments, the remaining balance may be forgiven (payments may be forgiven after 10 years for those in certain public interest jobs and after 25 years for graduate school borrowers). For more information, visit the federal government’s student aid website at
  • Loan consolidation: Loan consolidation is technically not a repayment option, but it does overlap. With loan consolidation, you combine several student loans into one loan, sometimes at a lower interest rate. Thus, you can write one check each month. You need to apply for loan consolidation, and different lenders have different rules about which loans qualify for consolidation. However, with most loan consolidations, you can choose an extended repayment and/or a graduated repayment plan in addition to a standard repayment plan.

To pick the best repayment option, you’ll need to determine the amount of discretionary income that you have to put toward your student loan each month. This, in turn, requires you to make a budget and track your monthly income and expenses.

In addition to inquiring about repayment options, ask whether your lender offers any special discounts for prompt loan repayment. For example, some lenders may shave a percentage point off your interest rate if you allow them to directly debit your checking account each month. Or, they may waive some monthly payments after receiving on-time payments for a certain length of time.

Consider a deferment, forbearance, or loan cancellation if you can’t pay

At times, you may find it financially difficult or impossible to repay your student loan. The worst thing you can do is ignore your payments (and your lender) completely. The best thing you can do is contact your lender and apply for a deferment, forbearance, or cancellation of your loan.

  • Deferment: With a deferment, your lender grants you a temporary reprieve from repaying your student loan based on a specific condition, such as unemployment, temporary disability, military service, or a return to graduate school on a full-time basis. For federal loans, the federal government pays the interest that accrues during the deferment period, so your loan balance won’t increase. A deferment usually lasts six months, and you are limited in the total number of deferments you can take over the life of the loan.
  • Forbearance: With a forbearance, your lender grants you permission to reduce or stop your loan payments for a certain period of time at its discretion (one common reason is economic hardship). However, interest continues to accrue, even on federal loans. Like a deferment, a forbearance usually lasts six months, and the total number allowed over the life of the loan is limited.
  • Cancellation: With a cancellation, your loan is permanently wiped off your list of financial obligations. It’s not easy to qualify for a cancellation, though. Situations when this may be allowed are the death or permanent total disability of the borrower, or if the borrower takes a job teaching needy populations in certain geographic areas. Typically, student loans can’t be discharged in bankruptcy.

Remember, these things are never automatic. You’ll need to fill out the appropriate application from your lender, attach any supporting documentation, and follow up to make sure that your application has been processed correctly.

Keep track of your paperwork

If your idea of organization is stuffing your random assortment of student loan papers into your sock drawer, or not keeping them all, think again. Repaying your student loans is a serious matter, and you’ll need to stay on top of it. It’s important to keep accurate, accessible records. Open a file folder for each loan, and file any accompanying paperwork there, such as copies of promissory notes, coupon booklets, correspondence from your lender, deferment and/or forbearance paperwork, and notes of any phone calls.

Investigate the student loan interest deduction

On the bright side, you might be able to deduct some or all of the student loan interest you pay on your federal tax return. In 2018, if you’re a single filer with a modified adjusted gross income (MAGI) under $65,000 or a joint filer with a MAGI under $135,000, you can deduct up to $2,500 of student loan interest that you pay during the year. A partial deduction is available to single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $135,000 and $165,000.

There are a couple of hurdles, though. You must have incurred the loans when you were at least a half-time student, and you can’t take the deduction if you’re claimed as a dependent on someone else’s tax return.

If you paid $600 or more of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E at tax time from your lender, showing the amount of student loan interest you’ve paid for the year. For more information, see IRS Publication 970.

Comparison of Federal Higher Education Loans

Direct Unsubsidized Stafford Loan Direct Subsidized Stafford Loan Perkins Loan Direct PLUS Loan
Description A federal student loan available to students regardless of financial need A federal student loan available to students with financial need A federal student loan available to students with the greatest financial need A federal loan available to parents and students with good credit histories regardless of financial need
Available to Undergraduate and graduate students enrolled at least half-time Undergraduate students only enrolled at least half-time Undergraduate and graduate students (can be less than half-time) Parents of undergraduate students enrolled at least half-time, and graduate and professional students
Lender Federal government only Federal government only College Federal government only
Borrower Student Student Student Parent or graduate or professional student
Based on financial need No Yes Yes No
Interest rate for 2018/2019 5.045% fixed for undergraduates; 6.595% fixed for graduate students 5.045% fixed 5% 7.595% fixed
Interest subsidized No Yes1 Yes1 No
Grace period 6 months 6 months Generally 9 months 6 months
Loan limits for 2018/2019 Dependent undergraduates: Undergraduate students:$5,500/year $27,500 limit

Graduate students:$8,000/year $60,000 limit (including undergraduate loans)

Student’s total cost of education, minus any other financial aid received
1st year: $5,500 ($3,500 subsidized)
2nd year: $6,500 ($4,500 subsidized)
3rd – 5th year: $7,500/year ($5,500/year subsidized)
Maximum: $31,000
Independent undergraduates and dependent undergraduates whose parents don’t qualify for PLUS loans:
1st year: $9,500
($3,500 subsidized)
2nd year: $10,500
($4,500 subsidized)
3rd – 5th year: $12,500/year
($5,500/year subsidized)
Maximum: $57,500
Graduate students:
Any year: $20,500/year
Maximum: $138,500, including undergraduate loans

1The federal government pays the interest on the loan when the student is in school at least half-time, in a grace period, or in a deferment period.

Comparison of Education Tax Credits and Deductions

American Opportunity credit Lifetime Learning credit Student loan interest deduction Tuition and fees deduction
Credit/deduction applies to Qualified tuition and related expenses for first four years of undergraduate education Qualified tuition and related expenses for courses taken throughout lifetime to improve or acquire job skills Interest paid on a qualified student loan Qualified higher education expenses paid during the year

Not available in 2018

Qualified education expenses include room and board? No No Yes N/A
Maximum credit/deduction $2,500 $2,000 $2,500 N/A
Income limits in 2018 Single filers:full credit available if modified adjusted gross income (MAGI) $80,000 or less

Partial credit available if MAGI between $80,000 and $90,000

Joint filers: full credit available if MAGI $160,000 or less

Partial credit available if MAGI between $160,000 and $180,000

Single filers: full credit available if modified adjusted gross income (MAGI) $57,000 or less

Partial credit available if MAGI between $57,000 and $67,000

Joint filers: full credit available if MAGI $114,000 or less

Partial credit available if MAGI between $114,000 and $134,000

Single filers:full deduction available if modified adjusted gross income (MAGI) $65,000 or less

Partial deduction available if MAGI between $65,000 and $80,000

Joint filers: full deduction available if MAGI $135,000 or less

Partial deduction available if MAGI between $135,000 and $165,000

* Available in 2017, not 2018

Single filers:$4,000 (full) deduction available if modified adjusted gross income (MAGI) $65,000 or less

$2,000 (partial) deduction available if MAGI between $65,000 and $85,000

Joint filers:$4,000 (full) deduction available if MAGI $130,000 or less

$2,000 (partial) deduction available if MAGI between $130,000 and $160,000

Less than half-time students or graduate students eligible? No Yes Less than half-time–no; graduate students–yes N/A
Limit on number of students in family for whom credit/deduction can be taken in same year? No Yes, annual credit is limited to $2,000 per tax return No; if applicable, parents can claim the deduction for more than one child in the same year N/A
Credit/deduction available in same year as tax-free distribution from a Coverdell education savings account? Yes Yes Yes N/A
Must student be enrolled for a degree or in other program leading to an educational credential? Yes No Yes N/A
Allowed if student has a controlled substance conviction? No Yes Yes N/A

Finding the Funds to Pay for a College Education

Finding the funds to pay for your child’s college education is like filling a test tube. The length of the tube represents the cost of education at any one school–tuition, fees, books, room and board, transportation, and personal expenses.

The first ingredient is what you’ll have to contribute from your own pocket: the expected family contribution (EFC), which is determined by the federal government’s financial aid formula.

Your EFC is the same regardless of the college your child chooses. The difference between your EFC and the cost of a particular college equals your child’s financial need, which is a variable.

To meet this financial need, your child might be eligible for financial aid in the form of loans, grants, scholarships, and/or work-study funds from the federal government, the college itself, and/or independent organizations. (In some cases, a family’s EFC may be enough to satisfy all college costs.)

Your child may not receive all the financial aid he or she needs. If so, you’ll have to top off the tube with more of your own funds, which are in addition to the EFC.

Financial Aid Calendar

If your child will be applying for financial aid for college, here’s a calendar highlighting the important tasks to be done during senior year of high school.

September October November
Create a timetable of financial aid deadlines for each college

Obtain an FSA ID at as a prerequisite for submitting the FAFSA online

Obtain a username and password at as a prerequisite for submitting the CSS Profile online

Gather last two years of tax returns for parent and student

Complete and submit the FAFSA as soon as possible after October 1

Complete and submit the CSS Profile if student is applying to college early action or early decision

Research college and private scholarships and gather supporting materials (students may be considered for college scholarships automatically when they apply)
December January February
Complete and submit the CSS Profile if student is applying regular decision

Complete additional college-specific aid forms, if any

Complete and submit private scholarship applications

Review Student Aid Report (SAR) from FAFSA showing your expected family contribution (EFC)

Verify that all required federal and college financial aid forms have been submitted, and submit any additional documents as requested

Continue to complete and submit private scholarship applications

March April May
Watch for college acceptances; if acceptance contains offer of merit aid, make sure to understand requirements of any merit scholarships

Receive financial aid award letters from colleges detailing financial aid package; read each award letter carefully

Watch for notifications from private scholarship sources

Compare financial aid awards by comparing out-of-pocket costs at each college as well as total overall costs

Decide on a single college!

Sign and return financial aid award letter

Contact financial aid office to confirm all paperwork is in

Notify financial aid administrator of any changes in circumstances that may affect your family’s ability to pay EFC

June July August
High school graduation! Student signs student loan promissory notes, if applicable

Student receives federal student loan counseling, if applicable

Congratulations! Off to college!

College Application and Financial Aid Calendar

Activities for high school student’s senior year

Whether you’ve been saving and planning for your child’s college education the past 18 years or you just recently started discussing college plans with your child, senior year is the time when many decisions need to be made.

The summer before your child’s senior year is a good time to narrow down college choices. If you haven’t done so already, now is the time to research colleges online, request catalogs, attend college fairs, and visit campuses to help finalize the list of schools.

Be sure to note specific school deadlines for applications, scholarships, and financial aid forms and check it regularly. The following calendar is a general overview of the application and financial aid process.

Fall Winter Spring Summer
Research colleges online, attend college fairs, and visit college campuses to make a final list General admission applications are typically due in December or January—confirm deadline for each school Review financial aid packages offered by various colleges; compare out-of-pocket cost at each college Buy school and dorm supplies
Early decision/early action applications are typically due in October or November—confirm deadline for each school Submit college PROFILE financial aid form and college-specific financial aid forms where necessary Review ongoing requirements of any college scholarships if selected Work to earn spending money
Attend financial aid night at local high school Confirm that colleges have received all application and financial aid materials Make final decision and notify college by May 1 Prepare to move if you are going away to school
The federal government’s financial aid application, the FAFSA, can be filed as early as October 1 Continue to apply for college scholarships Pay required college deposit Sign student loan promissory note and receive federal student loan counseling if applicable
Apply for college-specific scholarships Research and apply for private scholarships Sign up for college orientation session if required Off to college!

Should I take out a home equity loan to pay for my child’s tuition?

AnswerIf you own a home and have equity in it, you may want to consider taking out a home equity loan as a source of funds for your child’s private school or college tuition. A home equity loan is secured by the equity you have built up in your home and can be structured as either a revolving line of credit or a second mortgage.

With a revolving line of credit, your lender establishes a credit limit that depends on the amount of equity you have built up in your home and your ability to make payments. You can then access as much money as you need (up to the maximum amount allowed) whenever you need it by writing a check or using a credit card. Generally, interest rates are variable and tied to an index, but may be guaranteed for an initial period (e.g., two years). Your monthly payments will also vary, depending upon your outstanding balance.

If the home equity loan is structured as a second mortgage, you borrow a fixed amount (typically no more than 80 percent of the equity in your home) that is transferred to you in full at the time of the closing. You must then repay that amount over a fixed term, just like you do on your original mortgage.

The advantages of a home equity loan include tax-deductible interest and, in most cases, a more favorable interest rate than traditional loans. Keep in mind, however, that a home equity loan puts your home at risk because it serves as collateral for the loan. In other words, your lender can foreclose on your home if you fail to repay the loan. In addition, you may have to pay closing costs, points, and other fees to obtain the loan.

Before you take out a home equity loan, shop around and compare the interest rates on home equity loans with the cost of borrowing elsewhere (e.g., financial aid loan programs) to see if a home equity loan is the right choice for you.

Should I use my 401(k) to fund my child’s college education?

You can, but it isn’t your best option. Your 401(k) plan should be dedicated primarily to your retirement.

There are two primary drawbacks to using your 401(k) for college funding. First, if you withdraw funds from your 401(k) before you are 59½, you will owe a 10% premature distribution penalty on the withdrawal. This penalty is in addition to income taxes you will owe on the withdrawal. Second, frequent dips into your 401(k) reduce the amount of money you ultimately have available to reap the benefits of compounding and tax deferral. This, in turn, reduces the overall funds for your retirement.

If you really need to use your 401(k) funds to pay for college, a better option might be to borrow from your plan if your plan allows loans. Plan loans are not taxed or penalized, as long as you repay the funds within a specified time period. But make sure you compare the cost of borrowing college funds from your plan with other finance options. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

If you want to save for college in a retirement vehicle, consider using a traditional IRA or Roth IRA instead. With IRAs, you will not owe a 10% premature distribution penalty on withdrawals you make before age 59½ if the money is used to pay your child’s qualified college expenses.

 Should I withdraw money from my IRA to pay for my child’s college tuition?

If you’re considering withdrawing money from your traditional IRA or Roth IRA to pay for college, you’ll want to evaluate several factors:

  • How many years you have until retirement
  • Your retirement balances
  • The amount of money you intend to withdraw
  • Whether you have other sources of money available
  • The tax consequences of a withdrawal

Both traditional IRAs and Roth IRAs allow you to withdraw money before age 59½ for a child’s college expenses without incurring the federal 10% early withdrawal penalty that normally applies to early withdrawals. As for income tax, Roth IRA withdrawals are typically tax free (if certain requirements are met) because Roth contributions are made with after-tax dollars (which means they have already been taxed). However, you’ll need to carefully consider the income tax consequences if your contributions to a traditional IRA were deductible. In this case, the amount you withdraw will be added to your taxable income for the year you withdraw it. This could be enough to put you in a higher tax bracket.

If you are close to retirement, look carefully at the impact of any withdrawal; a large withdrawal could alter your plans. Even if you aren’t close to retirement, it may take years for you to replace those lost funds, so think carefully before doing so.

Can a grandparent pay a grandchild’s tuition directly to the college without any gift tax issues?

Yes. The general rule for gifts is that any gift over the annual federal gift tax exclusion amount ($15,000 for individual gifts and $30,000 for joint gifts in 2018) is subject to federal gift tax and generation-skipping transfer tax (GSTT).

But an exception to this rule exists for tuition payments made directly to a qualifying educational organization to cover a student’s tuition expenses. Such payments are exempt from federal gift tax and GSTT, even if they exceed the annual gift tax exclusion amount. The key is that payments must be made directly to the college. You will not qualify for the exclusion if you gift the money directly to the student with instructions to apply it to tuition. The exclusion does not cover room and board expenses, books, or supplies.

However, keep in mind that direct payments to an educational institution on behalf of a student may result in a reduction in the student’s eligibility for need-based financial aid. Also, this type of gift may still be subject to state gift tax and/or GSTT. Consult a tax attorney in your state for more information.

 How do I know if our family is eligible for federal financial aid?

The answer is you won’t know, exactly, how much aid you qualify for until you officially apply. But you can get an idea ahead of time. The federal government has an online tool called the FAFSA4caster that you can complete to see if you might qualify for financial aid. Then at college time, you can fill out the government’s official aid application, the FAFSA, which stands for Free Application for Federal Student Aid.

Your current income is the main factor that determines whether your child will qualify for aid, but it’s not the only factor. Other important considerations include the number of children you have in college at the same time, your assets, and how many years you have until retirement.

Regarding assets, a common misconception is that all your hard work saving for retirement will count against you come financial aid time. However, the federal government’s formula for determining aid eligibility specifically excludes retirement assets from consideration. The federal formula also excludes home equity (in your primary residence only), cash value life insurance, and annuities. Be aware, however, that a college’s own institutional aid application may include one or more of these assets.

The rule is “When in doubt, apply.” The federal government’s aid application, the FAFSA, is free, so all that you will lose if you discover your child is ineligible for aid is just a few hours of your time. Also, by filling out the FAFSA, undergraduate and graduate students who are enrolled at least half-time become automatically eligible for the federal Direct Unsubsidized Stafford Loan, a low-interest federal student loan that is not based on financial need.

How do I apply for financial aid?

You should start by filling out the federal government’s aid application, the FAFSA. This application is used by both the federal government and colleges when federal money is being dispersed.

The best way to fill out and submit the FAFSA is online at the Department of Education’s website at In order to do so, you and your child will first need to obtain an FSA ID, which you can also do online.

The FAFSA relies on income information from two years prior (for example, the 2018/2019 FAFSA relies on your 2016 income tax return) and current asset information. The FAFSA has the ability to directly import your tax information using the IRS Retrieval Tool, which is built into the form. However, you will also have to answer additional questions. The FAFSA can be filed as early as October 1st in the year prior to the year your child will be attending school.

Regarding college financial aid, colleges generally require both the FAFSA and the PROFILE form (or their own aid form in place of the PROFILE). The PROFILE can also be filled out and submitted online. Make sure to find out which application your child’s college requires and make a note of all filing deadlines. Deadlines can vary depending on whether your child is a new student or a returning student and whether your child is applying early decision/early action or regular decision.

How does the federal financial aid process work?

For the federal government to determine your child’s financial aid eligibility, you must first complete its aid application known as the Free Application for Federal Student Aid, or FAFSA. The FAFSA requires specific income and asset information from both you and your child. Independent students do not need to list their parents’ information.

A specific formula is then applied that results in a figure known as the expected family contribution, or EFC. This figure is the amount of money your family must contribute to college costs for the year before the federal government awards any financial aid. The difference between the cost of attendance at your child’s college and your EFC is your child’s financial need.

The federal government notifies you of the amount of your EFC in a document known as the Student Aid Report, or SAR. The SAR is also sent to the colleges that your child has applied to. When your child is accepted at a college, the financial aid administrator at that school attempts to create a financial aid package that will meet your child’s financial need. The package will include various combinations of loans, grants, scholarships, and work-study programs, from both the government and the college. If appropriate, you will be given further information on where to apply for various loan programs.

If you’re lucky, your child’s financial aid package will meet all of his or her financial need. However, colleges aren’t obligated to do so. If a college doesn’t meet 100% of your child’s financial need, you are responsible for meeting this shortfall. In some cases, you may be able to present special personal or financial circumstances to the financial aid administrator in an attempt to increase your child’s aid award.

Are there any assets that are not counted for financial aid purposes?

Yes, assuming you are talking about federal financial aid. Under the federal government’s financial aid formula, four main types of assets are excluded from consideration when determining your child’s financial need:

  • All retirement accounts (e.g., IRAs, 401(k)s, 403(b)s)
  • Home equity in a primary residence
  • Annuities
  • Cash value life insurance

These assets are known as nonassessable assets. All other assets that belong to you and your child are known as assessable assets and include items like checking and savings accounts, stocks, bonds, mutual funds, 529 plans, Coverdell education savings accounts, custodial accounts, trusts, and investment property. The more assessable assets you have, the more money you will be expected to contribute to college costs.

For example, let’s say Mr. and Mrs. Green have a Roth IRA worth $50,000, home equity of $75,000, cash value life insurance of $100,000, and a mutual fund worth $25,000. Under the federal financial aid formula, the Greens are considered to have only $25,000 worth of assets (i.e., the mutual fund).

By contrast, Mr. and Mrs. White have stock holdings worth $30,000, a 529 plan worth $60,000, a Coverdell account worth $10,000, and home equity of $200,000. Under the federal financial aid formula, the Whites are deemed to have $100,000 worth of assets (i.e., stocks, 529 plan, and Coverdell account).

Individual colleges may use a formula that differs from the one used by the federal government to determine financial need. Specifically, the formula may take into account the value of your retirement accounts and/or home equity, and may even expect you to borrow against these assets.

Do colleges offer financial aid?

Yes. College financial aid typically consists of grants and/or scholarships that can be based on either financial need or merit. In many cases, college grants or scholarships can significantly reduce a family’s out of pocket costs.

For need-based grants and scholarships, colleges use both the federal government’s aid application, the FAFSA, and their own application, typically the standard PROFILE form, to determine a child’s financial need. The main difference between the FAFSA and the PROFILE is that the PROFILE digs deeper into your family’s finances. For example, the PROFILE application may require you to note your retirement balances, your home equity, and the type of cars you drive. Keep in mind that your child’s need-based grants or scholarships might fluctuate from year to year as your family’s financial circumstances change.

For merit based grants and scholarships, colleges will look at your child’s academic record and any other characteristics that are desirable to them as they build their class and look to encourage students to attend. If your child is offered a merit grant or scholarship, make sure to find out whether it’s renewable for all four years and the criteria required to maintain it.

One excellent way to get an advance estimate of how much grant or scholarship aid you can expect at a particular college is to use a net price calculator, which is available on every college website. You can enter your family’s financial information in the calculator and get a good ballpark estimate of how much grant or scholarship aid your child might receive at that particular college based on his or her personal profile. A net price calculator can be a very useful tool when your child is deciding what colleges to apply to because it allows you to compare what your out-of-pocket cost are likely to be at each school.

On a related note, colleges also receive money from the federal government that is then distributed as financial aid. For example, the Perkins Loan program is a federally funded loan program that is administered by individual colleges. Each college receives a certain amount of money for this program and awards are made on a first-come, first-served basis. Once the funds are dispersed, no more are available until the following year’s appropriation. The federal Supplemental Educational Opportunity Grant, known as SEOG, is also administered this way. If you think you will qualify for need-based aid, this should serve as an incentive to submit your application for financial aid as early as possible. And one final note: even if you don’t expect to qualify for need-based aid, you should still submit the FAFSA because some colleges may require it before your child is eligible for merit scholarships. Check with individual colleges for more information.

What happens if our child’s college does not give us all the financial aid we need?

You must make up the difference. A common misconception is that if your child qualifies for financial aid, he or she will receive 100% of the aid your family needs. In creating financial aid packages, colleges aren’t obligated to meet all of a student’s financial need. Colleges have limited financial aid budgets and tend to offer the most aid to those students who meet their specific enrollment goals.

If the college doesn’t meet 100% of your child’s financial need with a combination of loans, grants, scholarships, and work-study programs, you have been “gapped” by the college. You’re responsible for meeting this shortfall.

Options to bridge this financial gap include drawing on your own assets (e.g., withdrawing from a retirement account or liquidating stock holdings), applying more of your current income to college costs, or taking out private loans (e.g., home equity loan, general unsecured loan) or federal loan (e.g., Parent PLUS Loan). In many cases, a combination of these options is used.

If, despite your planning, you simply have no way of meeting the shortfall, you might consider contacting the financial aid administrator at your child’s school to discuss an increase in your child’s aid package. Follow the specific instructions in your child’s financial aid award letter. Generally, your chances of success are best if you can document a specific circumstance that prevents you from meeting the shortfall. Examples of such circumstances may include a recent job loss or prolonged unemployment, unusually high medical bills, or bills incurred while caring for an elderly relative. A general plea of an inability to pay is unlikely to bring results.

In an effort to avoid this problem, make it a priority in your college selection process to research the costs of specific colleges and the amount of financial aid that various schools award. Then choose only those schools that consistently meet all, or a high percentage, of their students’ financial need. In addition, a college’s net price calculator —available on every college website — can help you estimate how much grant aid your child can expect at a particular college, and thus what your out-of-pocket costs might be.

Can we negotiate our child’s financial aid award?

In some cases, yes. If you decide to appeal all or part of the award, follow the instructions in the award letter. In most cases, this will involve a polite business letter or email to the financial aid administrator (FAA) and a follow-up telephone call or meeting. Because the FAA may handle a number of similar requests, it’s important to clearly label your correspondence. You should also be persistent in following up on your request, but not to the point of being a pest.

The financial aid administrator has authority to exercise “professional judgment” to reduce the loan component of your child’s aid package and/or increase the scholarship, grant, or work-study component. Your chances of successfully renegotiating your child’s aid package are best in two situations.

The first situation is where you have any special circumstances that affect your ability to pay your expected family contribution (what the federal government’s financial aid form says you can afford) or any additional shortfall (the difference between your child’s financial need and what the college offers in its aid package). Examples of special circumstances include the disability of you or your spouse, a recent job loss or prolonged unemployment, unusually high medical expenses, long-term care costs for an elderly relative, or some other situation that puts above-average constraints on your current income and savings. By contrast, a general plea of an inability to pay will likely fall on deaf ears — most parents make financial sacrifices to send their kids to college. If you have a special circumstance, you should provide written documentation to the financial aid office.

The second situation is where your child has been accepted at two direct competitor colleges, and one has offered a more generous financial aid package than the other. This strategy works best with direct competitors. Although many colleges don’t care if they lose an applicant to a more (or less) selective college, they generally don’t like to lose an applicant to a direct competitor. In this case, you might contact College A and inquire if it could possibly match the amount of grants, scholarships, and/or work-study that College B offers. Of course, your child must have the qualities that College A is looking for.

Underlying your success in either situation will be the principle of supply and demand. Your chances will be best in the years when colleges are vying for limited applicants, as opposed to the years when applicants outnumber the available college slots. Your child’s high school guidance counselor should be able to give you an idea of the competitiveness of any particular college year.

Are any federal financial aid programs for parents of college students?

Yes. Although most financial aid is awarded directly to students, one major federal financial aid loan program is available to parents to assist them in paying their child’s college expenses. This loan is called the Parent PLUS Loan.

Parent PLUS Loans are available to any creditworthy parent of a student attending college at least half-time in an undergraduate degree or certificate program offered by an accredited post-secondary educational institution, including vocational or trade schools.

Parents can borrow up to the full cost of their child’s education (which may include tuition, fees, room and board, books, and supplies), minus any other financial aid received. For example, if the cost of education is $65,000 and the student receives aid totaling $25,000, a parent would be eligible to take out a $40,000 PLUS Loan.

The interest rate is fixed for the life of the loan and the rate on new loans is reset each June. The current interest rate on PLUS Loans issued for the 2018/2019 academic year (July 1, 2018 through June 30, 2019) is 7.595% (7% in 2017/2018). Disbursements are made directly to the school, usually in two equal installments. Interest begins accruing upon the first loan disbursement, and parents must begin to repay the loan within 60 days of the last disbursement for that academic year.

To apply for a PLUS Loan, parents must fill out a PLUS Loan application and a master promissory note. In most cases, parents will also need to file the federal government’s financial aid application, the FAFSA, so the college’s financial aid office can officially “certify” (approve) the loan. Check with your school’s financial aid office on their policy. Parents will also be subject to a credit check.

Graduate and professional students can also borrow under the PLUS Loan program too (these loans are called Grad PLUS Loans). the interest rate is the same as for Parent PLUS Loans.

Is there anything I can do now so that my child can obtain more financial aid later?

Yes, there are steps you can take now that may help your child obtain more financial aid later. All federally funded financial aid programs use a formula known as the federal methodology to determine how much money a family must contribute toward a child’s educational costs before becoming eligible for financial aid. This figure is known as the expected family contribution (EFC). The difference between your EFC and the cost of your child’s college equals your child’s financial need. The greater your EFC, the lower your child’s financial need and the less aid your child will be eligible for.

To determine your EFC, the federal methodology considers the value of your family’s income and assets in the calendar year two years before the year that your child applies for aid. In other words, it’s your tax information from two years ago that counts. This prior-prior year is known as the base year. Thus, lowering your income and assets in the base year can lower your EFC and increase your child’s financial aid eligibility. It’s important to note that these strategies aren’t meant to subvert the financial aid rules in any way. Instead, they simply take advantage of the rules regarding what is counted.

To lower your income and assets in the base year, you might try to:

  • Defer employment bonuses until after December 31
  • Sell investments that can be taken as a loss (if they’re not expected to recover)
  • Avoid selling investments that will incur capital gains or interest
  • Avoid pension plan and IRA distributions
  • Pay all federal and state income taxes due during the base year (this reduces your available cash–a countable asset–and you’re allowed to deduct taxes you paid during the base year on the financial aid application)
  • Use available cash to reduce outstanding consumer debt or to make large planned purchases

In addition to taking steps during the base year to lower your available income and assets, you can take steps several years before the time your child applies for aid. Generally, such strategies work best with your assets. Specifically, the federal methodology excludes four types of assets from consideration when determining how much your family is expected to contribute to college costs. These assets are home equity (in a primary residence only), all types of retirement plans, annuities, and cash value life insurance. So, all other things being equal, you might consider putting more of your cash in one or more of these vehicles because they aren’t counted for financial aid purposes.

One final note: Just because your child is eligible for more financial aid doesn’t necessarily mean that more of the aid will be in the form of favorable grants or scholarships. Your child may simply end up with more loans that will need to be repaid at some future date.

How can my child find scholarships for college?

Scholarships are definitely a preferred type of financial aid because they do not have to be repaid.

There are basically two types of scholarships: scholarships awarded on the basis of financial need and merit scholarships awarded on the basis of academic, athletic, musical, or artistic ability. Scholarships can come from two sources: colleges and everywhere else.

First, the easy part. Have your child check with the admissions office at each college he or she is interested in to find out what scholarships the college offers. Most colleges offer both need-based scholarships and merit scholarships. Typically students are automatically considered for these scholarships when they apply, but sometimes students will need to submit a separate application that may require an essay, teacher recommendation, or other supporting documents.

One great way to get an idea of how much aid (especially need-based) your child might be eligible for at a particular college is to fill out the college’s net price calculator on the college’s website. Every college is required to have one. A net price calculator can give you an advance estimate of the amount of aid your child might receive at that college based on your family’s financial and personal information.

Besides the colleges your child is interested in, the scholarship world is wide open. Virtually thousands of scholarships are offered each year by the federal government, individual states, and a wide variety of local, state, and national organizations. Although it is impossible to research them all, a tailored search is possible.

Have your child conduct a free scholarship search online. Scholarship websites can save a tremendous amount of time because they automatically exclude scholarships that don’t match a student’s qualifications, background, and interests. Your child should also ask his or her high school guidance counselor or local reference librarian for information on local scholarships. And don’t forget to check with your employer or any organization to which you belong to see if they offer college scholarships.

If your child finds a handful of appropriate scholarships, the next step is to follow each one’s instructions and apply by the required deadlines. Most scholarships require an essay, a grade transcript, a description of extracurricular activities, and recommendation letters.

Finally, a word of caution. Only a small percentage of the average student’s overall financial aid package consists of scholarships. So, while scholarships are certainly worth researching, such research should not be at the expense of filling out the federal government’s financial aid form (the FAFSA) or any applicable college or state financial aid forms.

Are scholarships and grants subject to federal income tax?

That depends on several factors. If you are a candidate for a degree at an educational institution and receive a qualified scholarship or fellowship that you use for tuition, fees, and required expenses (e.g., books, supplies, and equipment), you need not include the scholarship amount in your taxable income. (Note: the IRS has provided specific guidance regarding the definitions of educational institution and degree candidate.)

However, if your scholarship includes money for room, board, and other incidentals, those dollars are taxable. If you are not a candidate for a degree, your entire scholarship is taxable. If you receive a grant in exchange for performing required services for the school (e.g., working as a teaching assistant), the amount of the grant is generally taxable.

Note: Different rules may apply to tuition reductions and reimbursements.

My child is heading off to college this fall. What insurance issues does this raise?

As you send your child off to college, you probably have a lot of things on your mind, such as whether your child will eat right and get enough sleep, how to pay tuition, and what to do with that empty bedroom. And although insurance may seem like a low priority, there are some important issues you should consider.

As for health insurance, even if your child isn’t a student, the Patient Protection and Affordable Care Act requires your medical plan to extend dependent coverage for your adult child up to age 26. But if the plan is an HMO and your child’s college is far from home, accessing an approved provider may prove difficult. An alternative is to purchase health insurance coverage through your child’s college. Many colleges and universities offer low-cost health insurance for students. However, be sure to check the maximum coverage limits on school-subsidized health insurance carefully. They are generally much lower than your own policy, which is one reason the college plan is less expensive.

If your child will be living in a dorm or other university housing, his or her personal property will typically be covered under your homeowners insurance policy. However, you may want to check your policy for coverage limitations on certain items (e.g., computers and stereos). If your child moves out of the dorms and into an apartment, his or her personal property will usually no longer be covered under your policy. In that case, he or she should purchase a renters insurance policy to cover his or her possessions.

If your child will be taking a car to school, make sure that the car is properly insured. If the child owns the car, the insurance policy must be in his or her name. If the child is “borrowing” a family car, he or she must be listed as a driver on the insurance policy. Some insurance companies may require the child to be listed as the primary operator, since the car is in the child’s possession and not the parents’.

How long am I covered under my parents’ health insurance policies?

According to provisions of the Patient Protection and Affordable Care Act of 2010, whether you live at home or are away at college, you’re eligible to be covered under your parents’ health plan until you’re 26 years old. Ask your parents to check the policy for the details. Many students take advantage of health insurance plans offered by their colleges because such plans are relatively inexpensive and the services are close at hand. Whether you’re covered by your parents or your school, you’re likely to be on your own after you graduate. If you’re working, check any health insurance options your employer offers. If you’re not working or your employer offers no health benefits, consider purchasing short-term health insurance (if available) or catastrophic coverage, or look into your options under COBRA if you recently left a job.