Bridging the Gap Between the Cost of College and Actual Savings

By John H. Kaighn

So, you have opened a Coverdell Education Savings Account, and/or a 529 Plan and dollar-cost averaged religiously since you realized your children were interested in obtaining a college education.  Or, perhaps it is you who decided long ago, that you wanted to provide a college education for your children.  As your child’s senior year approaches, there are several steps you should be taking as a parent, while your child is completing those college applications.

It would be wonderful if we could all save every penny that we needed to put our children through college, but the fact of the matter is, most of us will fall short in the amount we will be able to save, before that first semester begins.  As my first daughter was applying to pharmacy schools in her junior year of high school, I realized this was going to be quite an ordeal.  Three years later, as my second daughter was applying to a major university, I realized, not only would we get through this, but with planning, sharing of expenses, hard work and the help of several sources, I’d realize the goal of helping my daughters obtain a college degree.  Furthermore, they would have a vested interest in it, because they bore some of the expense, and I would still own my house!

So, if you are like me, and you’ve fallen short on your savings, don’t panic.  This is the time for rational thinking and planning.  First of all, and this is the most important thing to remember, whatever you’ve saved for tuition and expenses should NOT be liquidated all at once.  Just as you saved on a systematic basis, so too should you REDEEM on a systematic basis.  It is like dollar cost averaging in reverse!  This method will give your savings a chance to grow, while your child is in college.  The chances are you may see a couple of good years of a bull market, while living through the college experience. 

Your child’s senior year of high school will find you in a whirlwind of college visits, college applications and scholarship applications, which are available in all high school guidance offices.  Hopefully, that acceptance letter will come before Christmas of senior year.  It just makes for a little less stress around the house during the holidays.  While everyone is enjoying the holidays, you need to be thinking TAXES.  The reason for thinking about taxes, is because as soon as humanly possible, you should get on the internet (this is the easiest way) and fill out the FAFSA.

FAFSA, you ask?  The FAFSA is the Free Application For Federal Student Aid, which is the first step in determining the amount of financial aid for which you may be eligible.  The link is FASFA .  While the application is lengthy, the features and templates are user friendly and I personally liked the website better than the paper application, which is available from your child’s high school.  Organization is extremely important while completing the FAFSA. 

To get organized:

            Gather documents, especially 1040’s for parent and child

            Check deadlines for the school your child has applied

            Register for a PIN

            Find School Codes

Once the FAFSA is completed and submitted, you will receive a SAR, which is the Student Aid Report.  This is the determination of the dollar amount the student and family are expected to provide for tuition and expenses.  The SAR goes to the college choices you indicated on the FAFSA and shortly after it is completed, the universities to which your child has applied will begin mailing the Financial Aid Award Letters.  These letters basically list the projected cost of the first school year, minus the expected family contribution (based on the FAFSA) and the amount of the award.  This is where academic performance in high school pays off.  Financial Aid Awards are merit and need based, and some of the awards your child could receive are:

            University Merit Awards – based on performance in high school & SAT

            Federal Pell Grants

            Federal Supplemental Opportunity Grant

            Federal Perkins Loan

            Federal Work Study

            Federal Subsidized and Unsubsidized Stafford Loan

            PLUS Loans for Parents

            State Specific Loan Programs for Students and Parents

After looking through the programs listed above, you might be feeling just a bit overwhelmed, but if you look over the information thoroughly, you will begin to see how it all works together, once the FAFSA is completed. 

My final focus will be on SALLIE MAE, or the SLM Corporation.  Sallie Mae is the largest company providing funding and servicing of loans for college.  I have found the company to have excellent customer service, and a fantastic website for coordinating the entire college funding experience.  While at the time of this writing, interest rates are historically low, there is a certain security in knowing the loans are capped at a 9% interest rate, just in case we have a huge run up in interest rates, before you have finished paying off the loans you’ve received.

There are many repayment options, but the primary option is to pay as you go.  Loan proceeds are paid out prior to the first semester, and payment begins in March of the second semester.  If you have been able to save some money for college expenses, here is where the systematic withdrawal program, I spoke about earlier can go into effect.

Personally, I have used the systematic withdrawal approach with my investments in two ways.  First of all, most colleges and universities have a tuition management program, where you can opt to pay out of pocket for a portion of the tuition and expenses for any given year.  It is set up on a monthly basis, and instead of liquidating a whole semester’s cost in one lump sum, simply liquidate the dollar amount needed to pay your monthly tuition management payment, which is usually interest free.  This way, you are selling small amounts of your investments at a time and still getting a return on the bulk of your savings.  The second systematic withdrawal approach I’ve used is to pay Sallie Mae PLUS Loans monthly from my investments.  It works the same way as the tuition management program, but these loans do have interest charges.  However, there is a good chance your investments can continue to gain more than the interest you are paying on the loans, at least in our current interest rate environment.  Essentially, you are leveraging your investments.  Online ACH transfers can save up to 0.25% or a ¼ point in interest payments on your PLUS Loans through Sallie Mae.  

Hopefully, this has been helpful to you in developing a plan for funding college.  If you need to contact me, please feel free to use the email link below.  Thanks for using our services, and good luck surviving the college funding experience.

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors, a Guidance Counselor in the Middle Township School District and writes articles on business, education and investment information, ideas and opportunities.  For more information please visit Jersey Benefits Group, Inc.,  or  Middle Twp. Guidance Office