It happened. We received our first college tuition bill. You might remember that Pippa is going to College of Wooster in the fall. New student orientation begins on August 18!
We aren’t newbies when it comes to paying for school tuition, but college takes it to a new level.
This despite Pippa earning an awesome college scholarship. I can’t exactly calculate the ROI on hitting the books in high school, but listen to this my teen parent readers: Superior grades and test scores will deliver serious discounts at many colleges. Of the 5 schools Pippa gained admission to, she received an average of $25,583 per year in merit aid, not including loans or work study.
But I digress. Now that we have a tuition invoice in hand, we have a few decisions to make.
When to Use 529 College Savings Plan Monies
This would be more challenging if we had a lot of money in Pippa’s tax-advantaged 529, but we didn’t start contributing to it until August 2013, and then only $250 a month for her, so there is only about $20,000 in there.
Although $20,000 is nothing to sneeze at. I’m a big believer in the Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Or the American variant: “The best time to start a 529 was the month Pippa was born. The second best time was August 2013.”
Because the 529 distribution counts as student income, you have to consider how it will affect the following year’s financial aid. There’s an exemption on the first $6,660 of student income (work study doesn’t count), but after that, up to half of a student’s income counts under the FAFSA. Most students don’t come anywhere close to earning $6,660, but 529 distributions added on can quickly put a student over the top.
CLARIFICATION (7/24/19): I’ve received feedback from a 529 professional – thanks Bob! – that if the parent is the owner of the 529, the current value is treated as a parent asset on the FAFSA. Distributions from the 529 are only treated as student income if the owner of the account is someone other than the parent. This is addressed by Question 45j.
It’s important to remember that FAFSA calculations are based on the ‘prior-prior’ year (this is new), so Pippa’s income in her junior and senior year of college won’t have any influence on her financial aid. So given the relatively modest amount of money in her 529, we’ll wait until her junior year to begin disbursing funds from it.
But no later. The 529 funds can also be used for graduate school, but who knows if Pippa will attend, and if she does, it’s possible that she will win a big fat scholarship that pays for it. Or that we’ll insist she pay for all of it (Nora and I haven’t had that discussion yet).
For now, we will continue to contribute and watch her fund grow tax-free. And we’ll be sure to drain it in a couple years, so we don’t get hit with improper withdrawal taxes and a 10% penalty. Ouch!
Whether to Sign Up for Monthly Payment Plan
Wooster offers a monthly payment plan that is administered by Tuition Management Systems. For a $75 fee, you pay equal installments over a period of five months.
For our $12,404 semester obligation, that means a $2,480.80 payment each month from June to October.
Because the standard full fall semester payment isn’t due until August 10, you are really only buying two months of delayed payment (September & October) – a total of $4,961.60 for us.
Using an annual percentage rate (APR) calculator, the $75 fee is essentially a 12% compound monthly APR cost of borrowing the $4,961.60 for two months.
So a higher cost than borrowing money from home equity, and definitely more than we could earn by taking the ‘loan’ and parking the cash in an investment. So we’ll be making the single lump sum payment in August.
Whether to Sign Up for Tuition Refund Plan
New this year, Wooster is automatically enrolling everyone into a Tuition Refund Insurance plan, with optional opt out. It’s administered by A.W.G. Dewar and Wooster says it doesn’t receive any compensation from the insurer for student enrollment in the plan.
The plan is $273 per semester. It supplements the college’s existing refund plan:
As you can see, the supplemental plan ensures an 80% refund if Pippa were forced to drop out due to injury or illness. For our $12,404 semester obligation, that means a $9,923.20 refund if Pippa dropped out.
As I’ve written before, I only believe in insurance for things that can lead to catastrophic loss: house burning to the ground, a big liability lawsuit, a cancer diagnosis. Otherwise, the cost of premiums over time will more than pay for the loss. Way more.
Wanting to be a team player (and involve Pippa in decision-making), I sent this email to Nora and Pippa:
“We need to decide if we want to opt out of the tuition refund insurance. It’s $273 x 8 semesters = $2,184. If Pippa gets sick or injured and has to drop out of a semester, we’d get a refund of about $10,000. Given the odds, prolly worth skipping. What do you think?”
No response from Nora, but Pippa responded within the hour: “well i ain’t planning on being sick”
I shot back: “No one plans on being sick, you silly goose”
Later that day, I opted out of the program.
If you have a kid in college, how are you minimizing expenses?