Paying the Family’s Share of College Costs Part I

You’re a high school senior. You were accepted at a number of universities you applied to and you decided where to attend this coming fall. The financial aid you received, while generous, does not completely cover the cost of school. So what are the options you and your parents can consider in paying the deficit?

The more obvious options include a 529 prepaid tuition plan and a 529 savings plan, if you are the beneficiary of such a plan. The 529 prepaid will automatically be tapped by the school and would have been considered in determining your financial aid offering, so you really have no control over its use. Money in a 529 savings plan can be used for qualifying educational expenses at your discretion. The amount must equal the deficit after grants and scholarships in the tax year in which it is paid out.

The first option beyond these planned resources is the use of payment plans offered by the college or university. Normally set up on a 10 month schedule, they do not carry interest charges and can be deducted directly from a bank account. If the deficit or even a portion of it can be absorbed in the family’s monthly budget, this should be the first consideration. Even adjusting your family’s lifestyle to free up room in the budget for a payment plan would be the most prudent approach.

Then there is the option of using other investment assets, such as IRA’s and taxable brokerage and mutual fund accounts.

Your parents can use funds from Traditional and Roth IRA’s for qualifying educational expenses without incurring the 10% premature withdrawal penalty prior to age 59½, however, the money coming out of a Traditional IRA will be taxed as income given the account was funded completely with pre-tax dollars. Since a Roth IRA is funded with post-tax dollars there is no income tax due on withdrawals from those accounts. If these accounts represent your parent’s only retirement plan, consideration should given to other options rather than jeopardizing your parent’s retirement years.

Taxable accounts, no matter what their legal wrapper (joint, custodial, trust, etc.), create a tax circumstance at the time assets are sold – the difference between the purchase price of the investment and the sales price. The sale results in either a capital gain or a capital loss and there are no strings attached to the use of the proceeds.

Using the cash value of life insurance is also a possibility, but the caveat is if the life insurance was set up to protect against the loss of life, loans against the cash value will decrease the payout if death should occur. Whole life insurance can be used as a vehicle to save for college expenses and if this was its intended purpose, the withdrawal against the cash value would be anticipated in the overall financial plan.

Let’s not forget about private scholarships that you might be able to tap into. Narrow in focus, time intensive to apply for and very competitive, private scholarship offers abound, but few students truly benefit, yet it’s worth a look. Does the employers your parents work for offer assistance? Are there local organizations that help students? Use a free on-line search engine to see what’s out there.

If you can handle the additional stress on your schedule, a part-time job is always a consideration and can help cover the cost of books and other miscellaneous expenses. Be careful not to sacrifice your studies for a few dollars in pay.


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