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Five Ways to Cover College Tuition
By David Chazin
With college admission letters coming in, most Chevron employees either have children or know someone with children who are trying to decide where to go next year. Now seems as good a time as any to look at the other part of the decision-making process – how to pay for college.
There is no escaping the fact that college costs are rising. According to the College Board, a not-for-profit membership organization composed of more than 4,700 educational organizations, the average annual tuition at four-year private universities is $27,923, and $7,605 at four-year public universities. As recently as five years ago, those numbers were $20,082 (an increase of 39%!) and $5,132 (a whopping 48%!), respectively.
As you or your fellow Chevron employees think about paying the fall semester’s college tuition bill, you might be trying to figure out which assets to tap for the payments. But the action you take could affect not only this year’s tax bill, but also your federal financial aid package and expected family contribution next year.
Proper planning is essential for covering what could amount to being one of your largest bills. Outside of scholarships and federal financial aid, there are five basic approaches to covering tuition costs; a financial planner can help you determine which would work best for your personal situation and goals.
1. Put a Solid Plan in Place
The best time to start thinking about how you’ll pay for college is as early as possible, or at least before your oldest child is a freshman or sophomore in high school. It’s a good idea to shift assets to conservative investments such as bonds at least five years before you think you’ll need the money, so that you are sure to have it when you do.
One advantage of starting early is you can utilize the tax advantages of accounts that are specifically designed to help you save for college, known as 529 accounts. There are restrictions that come with these tax advantages, which you need to consider before investing in a 529 account.
If you don’t expect to qualify for financial aid (since many Chevron employees have high-paying jobs) and you have highly appreciated stock or mutual fund shares, there could be a tax benefit to gifting the shares to your college-bound child. However, if you’re eligible for financial aid, that’s one of the last things you want to do since assets in your child’s name will affect financial aid eligibility drastically.
Since assets such as a life insurance policy and your ESIP are not included in income calculations for financial aid packages, you may want to consider holding adequate amounts of such assets.
2. Use Money in Savings
The benefit of using money in a savings account or a money-market account to pay tuition is that there are no negative income-tax ramifications, plus it’s easy to access. While savings accounts typically don’t pay high interest rates, they’re considered liquid investments since there isn’t a penalty for a withdrawal. CD’s, on the other hand, might offer a better interest rate but often charge a fee for a withdrawal made before the maturity date.
3. Sell Stocks or Mutual Funds
If you have the majority of your assets in the market, selling some may be an appealing option, since stock is relatively easy to liquidate. But keep in mind that if you sell at a gain, it’s considered income and you’ll owe taxes on the profit—and the boost in income you receive may reduce your financial aid eligibility for the following year. Thus, for every dollar your income increases, your aid eligibility could be significantly reduced. For Chevron employees receiving stock options, this can be a viable means of funding college, as long as you’ve reviewed the tax implications.
4. Take Out a Loan
While a home-equity loan might seem like a sound option, prime interest rates fluctuate and might not be low forever. It may also make sense to take out a loan from your ESIP or another type of defined-contribution retirement plan. You don’t have to pay taxes on withdrawals from a 401(k) plan used for qualified education expenses—and you’ll pay interest to yourself when paying back the loan. However, most plans have a five-year repayment period and limit loan amounts. In addition, there are tax consequences if you owe a balance on the loan when you leave Chevron.
The best options are the Stafford Loans for students and the Parental Loan for Undergraduate Studies (PLUS), which have relatively low interest rates compared with home-equity loan rates. The interest paid on Stafford Loans—depending on tax brackets—may even be tax-deductible. While Federal guidelines set ceilings on the amount that can be borrowed through these programs, eligibility isn’t based on income or assets.
5. Boost Household Income
In reviewing the tuition bill you’ve probably had the thought, “I simply need to earn more money.” But before you go trying to reach the next pay grade, take heart: while increasing your household income might sound like a reasonable game plan on the surface, the extra earnings, after being reduced by taxes, are often scooped up by the school through a higher expected-family-contribution and can affect your financial aid eligibility the following year.
And financial aid is a very important part of the equation. According to the College Board, more than $154 billion in financial aid was awarded to undergraduate students in 2009-10. The average amount of aid for a full-time undergraduate student was about $11,500, including more than $6,000 in grants that don’t have to be repaid.
I’d be happy to arrange a meeting with you to review your college tuition funding strategy, whether college is next year or 15 years out. Because I work with many Chevron executives, managers, employees and retirees, I'm very knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet.
David Chazin, Insight Wealth Strategies and Lincoln Financial Advisors Corp are not affiliated with Chevron.