Planning and paying for higher education
The rising cost of higher education is out pacing inflation and families need to plan accordingly.
May 1, 2017 - Author: Terry Jones, Michigan State University Extension
The rising cost of higher education is out-pacing inflation by an average of about 4 percent. Between 2012 and 2017, tuition has risen by approximately 9 percent in most cases. Many families are struggling to find what may be the best way to pay for college.
Applying for financial aid is usually the first step that individuals will make to help with the cost. There are four basic types of aid that can be received: work study, grants, loans (federal and private) and scholarships. This is done by filling out the Free Application for Federal Student Aid (FAFSA form). The form is filled out between October and February before the student’s fall and spring classes to determine what financial aid one is eligible for, based on need. Student resources, parent’s resources (if student is considered a dependent) and academic status (full-time, part-time) are used in the calculation.
Once the FAFSA form is completed, it will create the Expected Family Contribution (EFC). The EFC is not the amount of money the family will have to pay for college nor is it the amount of federal student aid one will receive. It is a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school will send a financial aid award letter in the spring. This will then assist in calculating what will be needed to cover cost of attending school for a year.
If there is time, specific college saving tools are available. Many states have 529 plans. The benefits of these plans are: withdraws are not taxable, earnings are tax deferred, contributions are considered gifts, and funds can be transferred between siblings and doesn’t impact American Opportunity, HOPE and Lifetime Learning Education Tax Credits. Coverdell Educational Savings Account is another savings vehicle for college. It works similar to a Roth IRA, but strictly for education. Michigan has a number of resources available to assist in paying for higher education to learn more about these resources go to: MIStudentAid website.
There are a few creative solutions that families may consider. Relatives are helping through estate planning strategies such as gifting or paying tuition directly to the university (no gift taxes). Parents and students are sharing on the contribution to school by using funds freed up by the student no longer living in the household and/or cutting back on expenses.
Michigan State University Extension offers free webinars on student loans. Find dates and times of the next webinars online. Additional information is available at the National eXtension site. There you will find fact sheets to determine repayment options and general information about student loans.