Navigating the College Financial Maze

May 2006

Most everyone would agree that in today’s world, you need a college education to land the best jobs. With the skyrocketing costs of tuition and fees, it is becoming more difficult for the average Wisconsin family to afford a college education for their children.

Recent estimates determined that based on annual college costs increases, an American child who entered kindergarten in 1995 will face four-year college costs exceeding $100,000 if he or she attends a public college. You can double that amount for a private university.

As you sit down with your child and begin navigating the student financial aid forms, you might want to start with the Free Application for Federal Student Aid (FAFSA). This form is available online (http://www.fafsa.ed.gov) and will save the student’s information, so that you do not have to start from scratch each year. More than 236,000 Wisconsin residents filed this form last year.

One study showed that 850,000 students who didn’t file the FAFSA form would have been eligible for federal Pell Grants. This program is the largest federal grant program available to students. Unlike loan funding, these grants do not have to be repaid.

Here are some other options to consider when financing your child’s college education:

Coverdell Education Savings Account—Up to $2,000 pre-tax can be invested annually in an “Education IRA”, which can be used to cover not only college expenses, but K-12 expenses, too. Income from these accounts is tax-free when used to pay for allowed expenses.

EE US Savings Bonds—Interest earned from these bonds may be excluded from income if used to pay for qualified higher education expenses.

Uniform Gift to Minors Act (UGMA)—Allows parents to make a joint tax-free gift of $22,000 each year per child without affecting their lifetime gifting exemption. The downside to the option is loss of parental control when a child reaches 18 years of age. The child gains control of the money and may decide that a $40,000 car is more important than a college education.

Prepaid Tuition Plans—Wisconsin’s EdVest plan (www.EdVest.com) provides a state income tax deduction for parents and grandparents of up to $3,000. For instance, if your state tax rate is 6.75 percent, your EdVest contribution would reduce your state income tax bill by $202.50; thus, your $3,000 would “cost” you $2,797.50. In addition, withdrawals used for college expenses will not be taxed at the federal level. Wisconsin recently improved EdVest by increasing the number of investment options to include the Vanguard Stock Index Portfolio, the Baird bond portfolio, and more.

Consult your financial planner or visit with the financial aid office at the college or university your child plans to attend. For information on contacting the financial aid offices of colleges in Wisconsin, visit the Wisconsin Higher Educational Aids Board web page, Financial Aid Application Information. Also check into scholarships. Millions of dollars in scholarship money go unused because parents do not think their child will qualify unless he or she is an academic or athletic star.

  Provided as a public service by the Community Bankers of Wisconsin (CBW)