Paying for college: Planning if you don’t plan on getting aid

The handy FinAid calculator may show that your family will get little or no financial aid for the college of your kid’s dreams. It happens, and many families are surprised when it does. They may not think of themselves as rich, or maybe life got in the way of saving money. Furthermore, colleges expect that families will sacrifice to pay tuition. They don’t think it’s unreasonable for you to give up vacation for a few years or to go a few more years without a new car.

If you aren’t likely to get aid, then the steps you take leading up to freshman year will be different than if you are likely to receive aid. Don’t mix them up!

The first thing to do is figure out about how much money you can pay out of regular income. What’s left over each paycheck? Some of your expenses may go down a bit with a kid out of the nest – maybe not by much, but a little. (My mother still talks about how much the electric bill went down when there were no teenagers looking for snacks.) In most cases, cash income will the first source of money for tuition bills as it comes in regularly and there are no tax consequences to spending it.

Which brings us to the second component: what do you have in savings? Any savings that are in the child’s name and earmarked for college (e.g., a 529 plan) should be spent first, as that’s why the money was set aside in the first place. Also, the child’s tax rate is probably lower than yours, so the cost of drawing on this money will be smaller.

Then, you look to your own non-retirement savings. Will they cover the costs?

Beyond that, you can borrow money. That will almost definitely be less costly than breaking into retirement savings, especially if you have home equity to draw on. It’s not a great strategy, though, especially not for your eldest child’s freshman year.

Retirement savings are an absolute last resort. In fact, I don’t think you should consider them at all.

If that analysis shows that you have plenty of money, great! If not, there are some things you can do. One is pay off debt now in order to increase your cash flow later. Another is to start saving more money. Your child can take a job and set the money aside (every bit helps).

If your analysis shows that you won’t be able to pay for certain colleges because you won’t get aid, start talking to your child about it now. Don’t wait until he or she has fallen in love with a campus that will not give you financial aid and that you cannot afford. Steer the college search in a direction that you can afford. You want the process to end in a happy match, not heartbreak.

Finally, this is a good problem to have, even if it doesn’t seem like it!