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College funding: It’s a family affair

Aug 31, 2021 | RBC Wealth Management


What decisions come into play when choosing a college or university? Unfortunately for many families, cost is the deciding factor—not strength of program.


As the last few weeks of summer slip by and the back-to-school cadence grows steadier, many families – even those with young children – are beginning to think about college. When that time comes, how will their child afford an increasingly expensive post-secondary education?

For the 2020-21 school year, the average expense after paying tuition, fees, room and board was $26,820 at a public four-year college in the United States, and $54,880 at a four-year private school, according to the College Board. And these numbers continue to rise.

Many parents assume the burden of paying for their child’s college education falls mainly to them. In fact, according to a recent RBC Wealth Management-U.S. survey, 49 percent of Americans place greater importance on helping their children pay for their education than they do on saving for their own retirement.

But wealth planning professionals insist that paying for college is a responsibility the entire family – kids, parents and grandparents – should share. “It’s a noble goal that parents want to pay for college,” says Cyndy Ranzau, a wealth strategist at RBC Wealth Management-U.S. “But there are many other avenues to go about financing a college education.”

Children should be proactive and flexible

Ranzau advises that the student contribute to paying for his or her college, even in families who have the ability to fund all of their child’s post-secondary education. “For a variety of reasons it makes sense for the kids to have some skin in the game,” says Ranzau.

There are several ways that students can help fund their own college education. Working part-time over the summer and into the school year is perhaps the most obvious, but here are three other ways that students can contribute:

Earn college credits early

By taking Advanced Placement (AP) courses or special academic exams, students may be able to earn college credits while still in high school. Indeed, earning college credit through AP coursework is an increasingly popular option among high schools students.

Over the past decade, the number of students who graduate from high school having taken rigorous AP courses has nearly doubled, according to the College Board. AP courses and exam scores also help students qualify for scholarships. According to the College Board, 31 percent of colleges and universities look at AP experience when making scholarship decisions.

Consider community college

Children can reduce college costs considerably by spending two years in a local community college, then transferring to a four-year school.

Although enrollment in community college has decreased in recent years, according to data from the Community College Research Center, community colleges still represent a cost savings, says Ranzau. “The quality of the education you receive at a community college has increased, as has the ability for those credits to transfer to four-year schools,” she says.

Apply for scholarships and grants

Many scholarships and grants are available from the federal and state government, colleges, as well as religious and civic groups. Many middle and upper-middle class families mistakenly assume that their child won’t qualify for any sort of college aid. But there are a number of grants and scholarships that are not needs-based.

College hopefuls should begin researching grant and scholarship options as early as their freshman or sophomore years – before they get busy with ACT and SAT testing, college applications and heavier AP course loads, advises Ranzau.

Parents should look for opportunities everywhere

Funding a child’s education begins with educating oneself. Parents should develop an awareness of the different funding options available to families in order to determine the most appropriate solutions for their financial situation. A financial advisor can help parents understand the various funding options and balance the need to fund a child’s education without jeopardizing their need to save for retirement. Here are four options parents can explore:

529 plans

Qualified tuition plans – commonly known as 529 plans – are tax-advantaged savings plans sponsored by states, state agencies, or educational institutions. Earnings accumulate tax-free, provided they are used for qualified higher education expenses. And contribution limits for 529 plans are quite generous.

Coverdell education savings accounts

Coverdell education savings accounts can be established for any child under the age of 18, and the child does not need to be your dependent. If you meet specified maximum income limits, after-tax cash contributions up to $2,000 may be made annually and grow tax deferred. Distributions for education expenses are not included in income and may be used to fund both K-12 and post-secondary education costs.

Education assistance programs

Some employers offer partial tuition reimbursement or even company scholarships. Parents who work for midsize or large corporate employers should explore the education assistance options.

Life insurance

Some life insurance policies give policyholders the flexibility to access the cash value of their permanent life insurance policy through a loan or withdrawal.

Grandparents should consider required minimum distributions as a source

Grandparents can help ease the burden for both their children and grandchildren. Seniors who can afford to can choose to use a portion of their required minimum distributions from their retirement accounts to help fund their grandchildren’s college expenses, thereby enabling their adult children to continue building up their retirement funds.

“When people turn 72, they must start making withdrawals from their retirement accounts whether they need them or not,” says Ranzau, pointing out that  many retirees have either adjusted their lifestyle accordingly, or are living comfortably on Social Security payments and other savings.

“Retirees may not need those funds, but will take a penalty if they don’t withdraw the required minimum,” notes Ranzau. “Gifting excess monies to a grandchild in college is a great option for them.” Depending on how the funds are gifted, there may be tax consequences for gifts exceeding $14,000 annually, unless funds are paid directly to the college or university. 

Grandparents could also consider contributing to a custodial account – known as Uniform Transfers to Minors Act or Uniform Gifts to Minors Act accounts – established for a grandchild. Contributions to a 529 plan allow you to accelerate up to five years’ worth of annual gift tax exclusion amounts ($70,000 per beneficiary).

Since 529 assets are classified as parental assets, they may be more favorable in terms of helping students qualify for financial aid. The federal government Financial Aid Application (called the FAFSA) says 5.6 percent of parental assets must be available each year to pay college costs before financial aid may be forthcoming. A custodial account is classified as a student asset on the FAFSA application, and is assessed a rate of 20 percent per year for college costs.

Everyone should work together to tackle those college costs

Regardless of how grandparents choose to help, getting involved in funding education can be an invaluable gift to their adult children – because saving for college and retirement simultaneously is no easy task.

With the cost of a post-secondary education on the rise, helping the next generation of college-goers pay for school is increasingly becoming a family affair.

“Paying for college is a personal family planning decision,” says Ranzau. “It works best if you start the conversation with kids early, make a family plan, and figure out collectively, “how are we going to pay for this?’ ”


Wealth planning