With college bills looming, it's time for parents of recent and soon-to-be high school grads to start thinking about how they'll pay up.
It's no small amount to anticipate.
For the 2015-16 academic year, the net price to attend a private nonprofit institution — that's the cost of tuition, fees and room and board, less any scholarships and tax breaks earned — averaged $26,000, according to The College Board. At public four-year colleges, in-state students paid an average net price of $14,120 during that same year, while the bill for in-district students attending a public two-year college averaged $7,230.
Many families don't have much put aside: The average college savings balance is just $10,040, according to a 2015 report from lender Sallie Mae. So they expect to cover the cost using multiple sources, including those savings as well as their current income, loans and gifts from family.
But experts say figuring out which resources to tap into (and in what order and proportion) is no easy feat.
"You're juggling these multiple parameters," said Mark Kantrowitz, vice president of strategy for Cappex.com, a college and scholarship search site.
A wrong move could negatively impact financial aid in future years, result in missed opportunities for tax breaks or generate a bigger-than-necessary loan tab, he said.
Your family's best bet is to plan out a payment strategy that covers all four years — or longer, if you have two or more kids with some overlap in college attendance, said certified financial planner Carina Diamond, the managing director of SS&G Wealth Management in Akron, Ohio. "You need to pace yourself," she said.
Here's what to keep in mind:
If you meet the income limits and other qualifications to claim one of the credits or deductions for college expenses paid, plan for that early on, especially for those first and last tax years where you might only have one semester of expenses.
The IRS doesn't let taxpayers double-dip on breaks. Tuition paid with a tax-advantaged 529 fund or tax-free scholarship, for example, can't also count as tuition paid toward that tax credit, said Kantrowitz. So to get the full $2,500 value of the American Opportunity Tax Credit, someone would need to plan to cover $4,000 in tuition using income, loans and other eligible sources.
"Carve out that first," he said.
Depending on where you live, you might also be able to snag a tax break for contributing to a 529 college savings plan, even if you immediately withdraw those funds to pay for college bills. But check the details: Nearly a dozen states only allow a deduction for contributions exceeding withdrawals, Kantrowitz said.
Consider how much you can comfortably afford to put toward tuition payments each month without compromising other goals such as retirement, said certified financial planner Erin Durkin, director of client planning for EP Wealth Advisors in Torrance, California. Families who were already shelling out for private school or socking away 529 college savings contributions may find the shift easier; others may need to explore budget cuts.
Ask the college about a payment plan to help break up the bill into more manageable monthly installments. The setup fee is typically less than $100, and the balance won't accrue interest, Kantrowitz explained.
"I would recommend that ahead of other borrowing options," Kantrowitz said.
From a financial aid perspective, it can be in your best interest to spend down college savings sooner rather than later, said Diamond. Depending on your income and other elements like the number of kids in college, fewer assets may increase aid eligibility.
The Free Application for Federal Student Aid expects families to use up to 20 percent of assets owned by the student toward college costs, including custodial accounts like a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). There's a 5.64 percent contribution rate for parent-owned assets, which include 529 plans. The formula counts those as a parent asset even if they are in the student's name.
If a grandparent or other relative owns the 529, however, it's better to wait and use those funds in your student's final year, Durkin said.
That gives the funds more time to grow and also avoids a substantial financial aid hit: The FAFSA treats distributions from a grandparent's 529 account as untaxed income to the student on future aid filings, cutting aid by up to 50 percent.
But college savings are another area where it can pay to think long term. If your student is receiving a decent amount of grant money, for example, it may make sense to preserve some of the family's 529 account money for grad school, said Diamond. Or to benefit a younger sibling who may face higher costs. "What are the needs of the other kids?" she said.
Obviously, the less debt incurred, the better, but it can be a mistake to spend down college savings first to delay borrowing to a student's last college years. "You have to look at loans over the four years," said Diamond, and factor in any overlapping years where you'll have two or more kids in college at the same time.
The aim: Even out federal borrowing to avoid you or your student needing to take on more expensive debt.
"Federal student loans are cheaper and better than any private student loans," Kantrowitz said.
But there are caps for each year, and you can't borrow more to make up for loans you didn't take the prior year, he said. A first-year undergrad who is a dependent student, for example, can borrow up to a maximum $5,500 in direct subsidized and direct unsubsidized loans.
A borrowing game plan can also give you a sense of whether other options, like a home equity line of credit, might be more favorable. (Rates there tend to be low, Diamond said, and the interest may be deductible.)