By Kathleen Day
Washington Post Staff Writer
Sunday, January 28, 2007; F01
College sophomore Carli McGoff could have attended the University of Maryland directly from high school, a decision her parents could afford and would have supported. But the Silver Spring resident opted instead to attend Montgomery College on a merit scholarship for two years and live at home.
Her parents calculate the decision to attend a two-year community college saved them $26,000, money her father Chris McGoff says will now help pay for her to graduate from a four-year institution -- she has applied to be accepted as a junior at Georgetown University, Gettysburg College and Franklin & Marshall College. Wherever she goes, she'll get a diploma at a deep discount from what four full years at any of those institutions costs.
"That's the idea," says McGoff, joking that he fears publicity will make the strategy so popular it will be harder for his three younger children to use. "I admit I had a stigma about community college. Not anymore."
As the price of college has skyrocketed, millions of middle- and upper-middle-class families like the McGoffs have juggled to find ways to keep pace. These families earn too much to qualify for need-based scholarships, but few can afford to spend tens of thousands of dollars a year without a significant hit to their finances.
Saving early, as soon as a child is born, is the obvious and best strategy. But financial planners and college experts say for those who couldn't or didn't save enough, there are many ways to ease the pain of paying for a higher education: pushing students to apply for merit awards, choosing less expensive schools, taking classes at community colleges, even beefing up IRA contributions to reduce the annual income admissions folks will use to calculate aid.
Financial advisers say crafting an effective strategy to pay for college requires three mindsets that some middle-class parents may find tough to embrace: being realistic about what your family can afford; being honest about what the goal of college is; and being willing to choose value over prestige.
"There's a feeling in the middle class that we want our kids to go to the very best school and that that means yearly expenses of about $40,000, no matter what," says Everette B. Orr, head of Orr Financial Planning in McLean. "I'm alarmed by the debt people take. They think everyone's doing it. They think it's normal -- parents and kids -- and it's not."
Saving StrategiesIn the Washington region, many people who think of themselves as relatively well off feel the pinch. That's because higher-than-average living costs push the range of a middle-class income for a family of four to anywhere from $80,000 to $200,000, depending on many factors, such as the number of other family dependents, financial planners say.
In the past 10 years, tuition, fees and the cost of room and board have increased 31 percent at private four-year colleges and 42 percent at public four-year institutions, according to the National Association of Student Financial Aid Administrators. For the 2006-2007 academic year, for example, living on campus at a private university such as Georgetown costs more than $180,000 over four years. Four years on campus at a state school can also be daunting -- $68,000 over four years to attend the University of Virginia for state residents, $130,000 for out-of-state students.
Those spiraling costs mean parents ideally should start thinking about college when their children are born. The first step for parents is to agree on how much they're willing to pay: Should they foot the bill for everything or just tuition? Should the student be required to work or take on debt, or will her sole requirement be to perform academically? No matter what, financial advisers unanimously agree that parents should not shortchange their own retirement savings to help pay for a child's education -- parents who do will only end up a burden to their children in the end.
Robert Oshinsky, a government economist, and his wife, Stephanie Weinstein, a research scientist, agree that they want to save as much as they can now to eventually cover all the higher-education expenses for their two children, a 4-year-old girl and a 20-month-old son. Oshinsky says they set aside about $300 a month per child -- after saving for retirement -- and try to increase it by about 10 percent a year.
"We were both lucky to come out of undergraduate and graduate school without debt," says Oshinsky, who lives in Rockville. "We feel it's the responsibility of the parent to educate the child. Our parents helped us, and we're going to turn around and do the same for our kids."
They put the money into a 529 account, a state-sponsored, tax-advantaged savings plan that financial planners agree is the best way to save for college. An unlimited number of people -- parents, grandparents -- can each contribute up to $12,000 a year per child without triggering gift-tax rules. Earnings on the money grows tax-free if it's used for higher education, a benefit that had been set to expire in a few years but that Congress just made permanent. Another feature of 529s, unlike traditional trust accounts, is that if the student the money was intended for ends up not needing it -- perhaps he received a scholarship -- it can be used for another child's education.
But savers should keep in mind that 529 funds are much like mutual fund investments, with the accompanying risk of loss as well as gains. They are run by financial firms on behalf of each state, which means the way money is invested varies, as does an investor's ability to control those decisions. Families should check and compare plans.
Many state plans -- including those offered by Virginia, Maryland and the District -- feature the added bonus of state tax breaks for contributions. One trick for the truly organized: Set up a 529 fund for yourself in the years before having a baby, and then transfer it to the child's name once he or she arrives.
Education savings strategies should be adjusted as a child's college enrollment date draws closer, financial planners say. Money should be shifted from stocks to safer investments, such as bonds and money-market accounts, so sudden market shifts don't erode gains just as they are needed.
Reality CheckBefore children begin to look seriously at schools, planners recommend that parents calculate what they can spend.
"Whenever you start, involve your kids and make sure they understand what you expect to pay, if anything, and the trade-off between public and private school costs," says William Harmon of Collegiate Funding Solutions a firm in North Carolina that provides college-funding strategies to financial planners.
Tom and Janet McGinnis decided early on -- and made clear to their three children -- that they could afford to pay for each to attend a Virginia state college. The children would have to pay their own way for extras like summer travel. And for graduate school, the kids were on their own.
Their eldest daughter, who works in computer science, studied at James Madison University. Their second daughter went to the College of William & Mary and is now on scholarship at Washington University in St. Louis pursuing an advanced medical degree. Their son, the youngest child, is to graduate from William & Mary this year and plans to go to law school. His choice will depend on which institution offers him more money.
"Why would I have spent $45,000 a year to send them somewhere else?" says Tom McGinnis, a retired Army captain who is proud to say he paid the college bills for all three without incurring any debt.
Planners argue against sending children to a costly, brand-name college just to impress friends and relatives. At the same time, they urge families not to rule out a school that suits a child's needs simply because of price. That's because it's possible that a family's expected contribution could be the same at a college that costs $8,000 a year and at one that costs $35,000, with both institutions offering aid to make up the difference.
How much a family is expected to contribute is largely based on a complicated form the government uses to determine a student's qualifications for federal aid. The form, the Free Application for Federal Student Aid, is available at http://www.fafsa.ed.gov/. Many colleges ask for additional information that could adjust that figure.
Parents should get an estimate of what their expected family contribution will be -- and compare it with what they can afford -- using worksheets, also available at http://www.fafsa.ed.gov/, before submitting their final form. As they crunch the numbers, financial planners say, parents should ask their children why they are drawn to certain schools and gauge whether those goals can be met less expensively.
Phil Dyer, a financial adviser in Timonium, says students should keep in mind that they will win merit aid more easily from less-popular schools. "Some second-tier schools want people who can pay something, so they give you some aid just to get you in the door," he says. "And you can still get a very good education."
Tax BreaksOnce a child is enrolled, families should be sure to use all the education tax breaks for which they qualify. The Hope Scholarship credit of up to $1,650 for each student and the Lifetime Learning credit of up to $2,000 for each student are available to single filers with income of less than $55,000 and joint filers with income of less than $110,000. A tax deduction of up to $4,000 on tuition costs is available to single filers with income of less than $80,000 and joint filers with income of less than $160,000. But there are complicated restrictions limiting how these breaks can be used. For more information, check with the IRS at http://www.irs.gov/.
If a family starts saving late -- when a child reaches junior high school, for example -- then it will have to make it up with extra-large contributions if it can. If it can't, though avoiding debt should be a priority, borrowing may be unavoidable.
Such families can consider subsidized or unsubsidized federal or private loans. Federal programs include the Stafford and Perkins loans for students, and the PLUS loans for parents of dependent children. In dire cases, financial planners say, parents could consider refinancing their home or taking out a home equity line of credit -- they can get a tax break on the interest on a line of credit up to $100,000.
A fee-only financial planner who charges by the hour may be able to show parents how to reduce the income the government uses to calculate a family's expected contribution, and therefore the amount needed to borrow. The year's income that counts is the calendar year preceding the fall the student will enter college. For students starting in September 2008, that would mean the 2007 tax year.
Here's one strategy to cut income: If parents have not each put $4,000 into an IRA for 2006, they have until April 15 to do so, for a total reduction of $8,000 to their 2007 income. They can also each deposit $4,000 for 2007, too, lopping another $8,000 from their income for the year. This can cut income, for college-funding purposes, by $16,000.
While paying a financial adviser for an hour or two to help fathom the tax code might make sense, government officials advise families not to pay anyone to help file the federal aid form. That's free and can be done online.
Making students borrow a reasonable amount of money can make sense because they may qualify for a better rate than their parents. And it might make them appreciate school more.
"It can help make the student more responsible," says John Vyge of Hillebrand Financial Planning in Dulles. "And it's just unrealistic for most middle-income people to think they can pay for everything."
