Budgeting for college is an important step, especially before your student gets serious about schools. It will tell you how much you can realistically spend on college and what funding sources are likely available. Certified Financial Planner Ann Garcia breaks down budgeting to help you build yours up. She’s sent two children through college debt-free and has plenty of real-world advice to share. Watch Ann’s full presentation followed by specific topics submitted by families.
*Parts of the transcripts in this article have been edited for readability.
The building blocks of your budget
What goes into a college budget? It can range from savings and out-of-pocket spending to tax credits and financial aid. Ann covers each funding source with critical information and offer tips to stretch your budget further.
Student contribution
Ann: I think it’s completely reasonable for students to take out the direct student loan. I know we often talk about student loans as a one-way ticket to the poor house, but I think the direct student loan is a reasonable investment for a student to make in their education.
Also, if you look around right now, wages are really high for kids. Your minimum wage is high, and many jobs are paying above minimum wage, so it’s not hard for students to accumulate a couple $1,000 via summer jobs.
The other thing that has changed in the last, say, 10 or 15 years is summer internships are paid now. As students continue their college journey, they can expect to be earning decent amounts of money in the summers before junior and senior year at a minimum.
I will also say, as a parent, most recruiting happens in the form of internships. Companies hire summer interns and that is who they hire into their programs for new college grads. So, there’s lots of good reasons to do internships.
When you think about your student’s contribution, ask yourself, What are they paying for and will they have the money available when they’re supposed to? That’s one reason why the direct student loan can be a good way to go because it’s dispersed. If they’re paying for part of their tuition, that gets dispersed directly to the college. It gets allocated over the course of the year, and that money is available to them.
There’s lots of ways for your student to have skin in the game.
If you want them to be responsible for their books and personal expenses, just make sure they have a summer job before they go to college. There’s lots of ways for your student to have skin in the game. Maybe it’s a percentage of college costs. Maybe they take out a student loan. Maybe it’s specific expenses they’re responsible for. Maybe it’s, Our budget is this and anything above that is on you.
Any of those is okay. Just make sure they’re going to have the money available when it needs to be paid. Books typically get bought at the beginning of the semester. Tuition is due at the beginning of the semester. If you’re living on campus, you may pay your room and board in installments, but it’s not equally allocated across the month.
Figure out what the payment cadence is for those things. For students who get work study and a merit award, those are applied against tuition and financial aid — they don’t have that money yet. So, it’s going to have to come from somewhere else.
Stacking scholarships
Ann: So, what stackable means is that you get a scholarship, and another one can go on top of it without taking any of it away. It can vary from school to school and by scholarship type. It can also vary by state because some states have outlawed reducing financial aid awards based on outside scholarships.
Need-based aid
What can happen is: When your student receives an outside scholarship, that is treated in the financial aid formula as student income. It’s part of the federal formula. It’s not something the schools have latitude around, and so they have to count it as student income.
It’s for the current school year, and so they will adjust the student’s financial aid package on that basis. There’s no set way of how they adjust it, but there are some rules.
One is that a Pell Grant can’t be reduced. So, if you are eligible for a Pell Grant, you get to keep that, but they might reduce your student loan. If you had a subsidized loan, they might change it to an unsubsidized loan. They might get rid of your work study, or they might reduce a grant award. It can be any of those.
I will give you an example for my daughter. She had every kind of financial aid. She had a merit scholarship, a need-based scholarship and an outside scholarship. One year, her outside scholarship reduced her grant. One year, it got rid of her work study. One year, she had no federal funds in her package. And one year, the check arrived late, and the school didn’t do anything about it. Even within the context of the same school and same student, you can get a different outcome every year.
Your best bet, if that’s you, is just to reach out to the college and ask them how they’re going to handle it. Oftentimes, if your student is highly need eligible, you might be better off just getting a summer job rather than applying for a lot of small outside scholarships. If you’re getting $500 here and $500 there, it’s really only $250 because it’s reducing your grant aid.
Merit aid
Merit aid almost always stacks. The reason for that is merit aid is given with the intention of getting you to enroll in the college. This is money that goes to students who are desirable to the college. So, they are not going to take that money away. But it is a requirement of the federal formula that outside merit scholarships be treated as income.
Budgeting for multiple college students
Ann: So, the good news for students who have need-based financial aid — and even those who don’t start out with need-based financial aid — is oftentimes your aid package will increase when a sibling goes to college.
Even though the FAFSA formula got rid of dividing by the number of students in college, the CSS Profile still does, and colleges can still consider that for their own financial aid.
When you have multiple kids in college, it’s always worth going to the college and just saying, “Hey, our second kid just started college. Is there any more scholarship money available to us?” The number one thing a college wants is for you to graduate. They don’t want to put you at risk financially of not doing so. It is almost always worth a couple $1,000 to them to keep you on the path towards graduation.
When you’re looking at your budget ahead of time, be realistic about how those dollars are going to flow through the years. I often encourage families to rely more heavily on cash flow in the years when they have only one student in college, so they have more savings available in the years that they have two.
If you’re someone who’s right on the edge of eligibility for an American Opportunity Tax Credit, the years when you have a couple students in school are the years to focus on, you know, putting more money into 401Ks so you can bring your income down below that threshold because you get that tax credit per student.
If you’re going to strategize for a couple of years, over the course of four, strategize for the years when you have more than one student in college.
Spending the parent vs. grandparent 529
Ann: So, the question that used to be on the FAFSA about, you know, did you take any money out of a grandparent 529, and that would count as student income, that’s gone away.
I think it still makes sense to spend down the parent 529 before you go to the grandparent 529. The reason for that is, in all the financial aid forms, you report your parent 529 as an asset, and so you might as well spend that down and reduce the amount of assets that you’re reporting.
The only time where that doesn’t really make sense is if you’re concerned that the grandparents are going to do something else with the money. There are lots of reasons for that. I will say, just as a financial planner and human being, if that grandparent is in such severe need that they’re considering taking the 529 back, that might not be a license to scoop it all up before grandma hires an in-home caretaker. But, yes, it’s generally best to spend down the parent 529 first and then the grandparent 529.
For students who aren’t eligible for need-based financial aid, you might want to swap it. Yes, your circumstances could change over time and maybe you do become eligible for need-based financial aid, but if you don’t have any need-based financial aid in your package, if it’s all merit scholarships or outside scholarships, then sometimes it makes sense to do the grandparent 529 first.
Oftentimes, by the time the student gets to high school, grandparents may have challenges with capacity, and it becomes more difficult to get that money out. So, it’s really just comes down to circumstances of your life and your family’s life and the person who owns the 529.
