The College Planning Smorgasbord

Hogan, Paula H.; Kroeger, Bret
July 2005
Journal of Financial Planning;Jul2005, Vol. 18 Issue 7, p40
Academic Journal
This article offers a conceptual framework for evaluating the various college financing options in a multigenerational context. The key driver to determining the optimal mix of college investment options is whether the family of a child is eligible for financial aid. College savings strategies vary greatly depending on whether the family is trying to maximize financial aid, or is clearly ineligible for financial aid and so instead will be concentrating on the most tax-efficient way to pay for college. An important concept is that financial aid calculations, such as the standard financial aid formula, actually compute not financial aid, but the amount the family is expected to contribute, expressed as a per-child expected family contribution. If financial aid is an option, financial planning can be complicated. Basically, the planing goal is to minimize wealth stored in the name of a child, but there are other, less obvious, considerations. For example, the rules relating to 529 plans are particularly confusing and in flux, and thus not surprisingly, there is great variation in the quality of reported financial data from students applying for financial aid. Alternatively, if a family does not qualify for financial aid, then a different set of planning options becomes appropriate, most of which focus on maximizing tax advantages. Here the key point is that the tax breaks for education expenses are designed so that the families who can afford to pay tuition usually do not qualify for the related tax breaks. In this context, the best approach to planning for college expenses is first of all to make a guess about whether financial aid is possible, then set in place a variety of strategies designed to diversify the risk of the changing landscape, and to keep planning options open. INSET: Executive Summary.


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