Saving for College
Higher education is more expensive than ever — but the right strategy can make sure both parents and kids are taken care of.
The cost of a college education has increased more than 1,000 percent in the past 35 years. That hard fact has led some well-meaning parents to sabotage their own retirement in order to pay their kids’ tuition. To address that issue, Jeffrey Smith, manager of Opes Advisors’ Marin County branch, makes college planning a part of every conversation with clients who are parents.
Smith starts by asking parents how much of their children’s college costs they want to cover.
“I’ve had clients who said, ‘I want to be prepared to pay for my kids all the way through Stanford post-grad,’ and I’ve had parents say, ‘If they want to go to school, they pay for it themselves.’ Others say, ‘I want my kids to have some skin in the game.’”
Smith helps clients calculate how much college realistically will cost by the time the little ones get there and crafts a savings strategy to help parents reach their planned contribution.
He favors 529 college savings plans, because they allow for tax-free growth and withdrawals. That’s how Smith and his wife saved for their own children’s education, and now that his oldest is college shopping, he’s glad they did.
If he could go back and change one thing, he might have considered front-loading the 529 plan with a large contribution early on. That’s an option he urges clients to consider when they are selling a home, for instance — sometimes it makes more sense to jump-start the college account instead of rolling all the proceeds into a new home. To do this, you’d have to check the contribution limit of the specific state 529 plan you’re using — California’s ScholarShare plan has no annual ceiling — and read up on the Internal Revenue Service’s gift tax rules.
Gary Sipos, founder of San Rafael’s College Cash Solutions, warns that 529 plans aren’t for every family, because having a large amount socked away there could put the student at a disadvantage when it’s time to apply for financial aid. For many clients, Sipos recommends other savings vehicles.
Sometimes, strategies can be found that play it safe with parents’ retirements and help kids too. Smith recalls warning one client that if she paid for her kids’ degrees up front, her retirement would be jeopardized. Instead, he recommended that her kids take out college loans.
“As we look over the next six to eight years, she very well may be in the position to pay for a good portion of those college expenses, in terms of the loans those kids have. That’s the strategy we designed for her,” he says.
Students wishing to make the leap to a university must have a solid plan.
When Darwin Guevarra set out to begin his college education, money was an obstacle — and not just tuition money.
“It would be a financial strain on my family if I moved out or away,” says Guevarra, who opted to start at City College of San Francisco in part so he could live at home and save on tuition. He eventually graduated from San Francisco State University and is now pursuing a Ph.D. in social psychology at the University of Michigan.
One in three UC graduates and one in two California State University graduates transferred from community colleges, according to the California Community Colleges Student Success Task Force.
Some start at junior college to help catch up on skills — that was part of Guevarra’s plan too — but the cost savings are the big incentive for many. One year at any California junior college runs about $1,380 for California residents, compared to about $7,017 for a CSU school and about $13,877 for a UC. Those figures include tuition and fees, but not room and board.
Students sacrifice some options by going to community college, such as the opportunity to participate in research and, for many, the experience of living on a campus far from home.
Getting into the required courses needed to transfer to a four-year university has become a challenge in recent years because of state budget cuts, says Cathy Summa-Wolfe, communications director at College of Marin: “Certain core courses like English 150, the math courses and some of the science courses can be challenging to get into because there's so much demand.”
It took Guevarra four years to transfer to S.F. State — but not because he couldn’t get into the required classes. He just lacked the guidance to get done and get out, he says. “There needs to be a better system set up, so that you’re always pushing people to transfer. ”
More student guidance was one of the recommendations in a 2011 report from the Student Success Task Force, which found that only 41 percent of transfer-seeking students successfully make the leap.
Students also must take responsibility for turning the goal of transferring into a reality, Summa-Wolfe says. “If students want to transfer, they need to understand how to work with the counselor to develop an educational plan so that they will focus on courses that will transfer to the university they want to go to.”
When it comes to getting help paying for college, it pays to ask questions.
Ann and Jim had a thriving business, yet seemed to have little to show for it.
“Their home equity line of credit was maxed out, their 401(k) and individual retirement accounts were gone, credit cards were maxed out — they were a financial mess,” says Gary Sipos, founder of San Rafael’s College Cash Solutions.
The cause of their financial distress was not a gambling problem or a medical emergency. It was an education problem. “They had three beautiful and — unfortunately — intelligent daughters,” Sipos recalls with a chuckle. “All three daughters got into Ivy League schools.”
What Ann and Jim didn’t know was that their family qualified for thousands of dollars in financial aid that they had never received.
Schools generally determine how much need-based financial aid students get by looking at the parents’ and students’ income and assets. Certain assets can be excluded from that formula, including small businesses that meet specific criteria. “They could have saved $30,000 a year if they had exempted their business,” Sipos says.
The rules governing financial aid are difficult for the average family to understand. To make things even more complicated, not all schools use families’ information in the same way. “Awards can vary greatly,” says Frances Fee, an Oakland financial aid consultant, who has seen different schools offer the same student packages that vary by more than $35,000.
In addition to helping families accurately fill out aid applications (the FAFSA and/or CSS Profile), Fee often helps them submit information not asked for on the forms. “Many families aren’t aware that they can write a letter explaining special circumstances that would affect their ability to contribute to college costs,” Fee says. Even families that bring in more than $200,000 sometimes receive aid if their expenses for a disabled sibling or high medical bills are taken into consideration.
Merit-based aid is separate from this process, and getting it depends on the student’s initiative to apply for scholarships. Emma Hoch-Schneider, a Bay Area student attending Lewis & Clark in Portland, uses the “Find Scholarships” tool at colleges.niche.com to search for awards. But she says full-time students don’t have much time to write scholarship essays on top of their course work. “It’s like applying to schools all over again,” she says.
Hoch-Schneider also worries that winning a scholarship might reduce her need-based aid package.
While that can happen, Fee concedes, often the result is that students have to borrow less money:
“Merit scholarships are definitely a help.”