As the dad of a high school senior this year. We are smack dab in the middle of “open house season” as it is being called in our house. I am eating too much tasty food each weekend, and my son Sam seems to be gallivanting through endless parties spread across Lake and Porter counties.
From the last soccer and basketball games, the excitement of the college acceptance letters, graduation itself, and surviving open house season, having a senior in the house is truly an emotional roller coaster. As part of this roller coaster for both my family and many of our fellow parents, the college tuition invoices are starting to arrive, turning what has been a hypothetical future expense into a current bill that is due in weeks.
This one is not my first rodeo, but I still find the process of paying for college to be a bit confusing. First, with at least the state schools I’ve experienced, the interpretation of financial privacy laws is absolutely bizarre. Because all of these new college kids are now legal adults, privacy rules require the schools not share financial information with parents without permission, which has my wife and I annoying Sam every day if he got any emails from I.U.
Eventually, when he goes into his university financial account online, he will have to authorize me to receive bills, and then the university will be happy to link my checking account to his account. So, tip number one for parents, make sure to understand how the university handles financial privacy, and get authorized to avoid any unnecessary neglect of the bills that will be coming. Not that most 18-year-olds aren’t completely responsible and financially diligent, but yeah.
While the deadline for completing the process for accessing federal financial aid (FAFSA) is passed (June 30), the award and acceptance of offered loans and aid will be occurring as tuition payments become due. It's important to understand the difference between loan types. Subsidized loans do not accrue interest while the student is enrolled. Unsubsidized loans do accrue interest, but don’t require payments while the student is enrolled. Parent Plus loans are applied for under a separate online process, and some schools may require a different process as well. Parent Plus loans are expensive, charging a higher than market interest rate as well as an origination fee.
I will reiterate my usual advice on student loans. I have come to view these financial products as perilous, and these loans must be used extremely carefully and managed diligently. Avoiding them is best, and not accepting any more funds than needed to fill in tuition gaps is vital to long-term financial health.
Most, if not all schools, will also offer an installment plan payment option for tuition, room and board. So, if the bill is intimidating, call the school and work out a plan. Installment plans often involve a fee, but if the installment plan can help avoid taking student loans it may be much lower cost over time.
If the family has accumulated funds in a 529 college savings account, now is game time. For ease and convenience, I typically pay college expenses out of my own bank account, and then use the 529 to reimburse myself. This is considered a qualified withdrawal for tax purposes, and the 529 company will ask if the withdrawal is qualified when it is requested. The State of Indiana offers a very attractive state tax benefit for 529 contributions so I continue to contribute monthly while my students are attending school, doing the math to make sure the account will be empty when the last bill comes due.
Finally, money can be withdrawn from an IRA account for college expenses of a child. While the withdrawal will be taxed as income, it will avoid the 10% early withdrawal penalty. The rules in this regard are a bit technical, and using retirement funds for college is not ideal, but IRA withdrawals can be a viable option if needed. I would suggest getting some planning advice before making this decision.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc Ruiz at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
