Time to pay for college. Are you ready?

preparing for college costs

Parents of college students starting the fall semester have come to the moment of truth — the moment when it’s time to start paying out all that money they’ve been saving and borrowing.

There are some rules involved in how you spend scholarship and grant money, as well as money you’ve saved in tax-advantaged accounts. I’ll discuss those in a moment. But first I’d like to give some advice to parents of high schoolers to help them avoid the moment of payment panic that is coming their way in a few years

Getting a good start on affording college

If your child is a high school freshman or sophomore, now is the time to have a talk about how much money you will be able to afford to spend on college. You can agree it’s fine to apply to a “reach” school, but make no guarantees your child will be able to attend if he or she is accepted. Encourage your child to build an impressive resume of activities as well as getting good grades in order to qualify for scholarships.

If you haven’t opened a 529 college savings plan, do so now and encouraged grandparents to contribute. Sophomore year is the time to move the assets inside the plan to the most conservative option. You don’t want to lose any money in the stock market from this point on!

Work with your high school guidance officer, starting in your child’s junior year, to build a list of schools to apply to. Your counselor may know which schools provide additional assistance beyond federal financial aid. Your child should start searching online for free money at websites such as Scholarships.com and Fastweb.com.

In your child’s senior year, file the FAFSA form on October 1 to qualify for as much federal financial aid as possible. Sitting with your child, go online to StudentAid.gov and show him or her the alternatives for student loans; impress on your child the cost of repayment. Use the student loan repayment calculator at Finaid.org to get a realistic look at monthly costs of debt repayment after graduation — it’s a true eye-opener!

At this point, you will understand the gap you must fill based on the expected cost of each school to which your child is applying. Naturally, you should try to qualify for additional financial aid or scholarships from each desired school, but you should also plan for the reality of either taking a home equity loan or refinancing (knowing the interest will not be tax deductible). Avoid the trap of Parent Plus loans because they are the most costly loans of all federal aid.

When it’s time to pay

Federal student aid is distributed through your school. Typically, the school first applies your grant or loan money toward your tuition, fees and (if you live on campus) room and board. Any money left over is paid to the student directly for other education expenses. Don’t blow it!

Check with scholarship providers well in advance to find out how and when that money is disbursed. That’s important, because you want to time any 529 plan withdrawals correctly to avoid penalties for excess withdrawals of money not needed that school year.

At SavingforCollege.com, you can search for the specific rules that apply to 529 plan disbursements. The key thing to remember is that 529 withdrawals are tax-free to the extent your child incurs qualified higher education expenses (QHEE) during the year. Those expenses include tuition, fees, books, supplies, computers and related equipment.

The 529 money can also be used for room and board, with some qualifications. If the student lives in campus housing, the 529 money can be used for the amount the school charges for room and board. But if the student lives at home or off campus, 529 money cannot be used in excess of the amount the college includes in its “cost of attendance” figures for federal financial aid purposes.

If you withdraw more than the QHEE in any one year, the excess is a nonqualified distribution, subject to taxes and a 10% early withdrawal penalty (except in cases of scholarship grants). So check your calendar carefully, making sure withdrawals and payments are made in the same year and for qualified expenses.

Paying for college is a high-finance project — not only in terms of cost but also in terms of the details. It pays to start learning the money part of the process early. And that’s The Savage Truth.