Financial Advisor Insights

How to figure out if you can afford to send your kids to private school

Private school isn't always part of the plan for many families. Parents often try to buy a nice house in a great school district under the assumption that their kids will attend the local public school. If something has changed and you're now considering sending your child to a private school, figuring out how you may be able to pay for it can be downright stressful.

Although it is a natural parental instinct to want to give your kids every possible leg up in life, spontaneously paying for private school can be a huge strain on a family, both financial and otherwise. Parents should try and consider whether the cost of private school is truly affordable and how attending a school outside of your local community may impact your family.

Why private school?

There are a number of different reasons parents turn to private schools. For families choosing to stay in a city instead of moving to the suburbs, the challenges facing inner city school systems are well documented, even in the most affluent urban areas. In this situation, private school is likely not a surprise, rather a calculated choice as part of the overall decision about where to raise a family.

However, for the families who already made the decision to move (or stay) in a suburban area with a strong local school system, a private school education may have more subtle benefits. As you begin to think about what's best for your family - and your finances - try to weigh the pros and cons as objectively as possible. This is a major financial decision in many households, so it is so important to go into it "eyes wide open."

In this article, we'll play devil's advocate to help parents begin to think about possible downsides to sending your kids to private school, other alternatives, and whether it may be truly affordable for you.

What's changed?

What is the reason you are no longer considering public school a viable option for your child's education? As you weigh the pros and cons of public versus private school, recall the reasons you selected the neighborhood or town you live in. Quality of local schools is frequently among the top deciding factors for homebuyers with children. Has the quality of the school district plummeted?

For children with learning disabilities or special needs, public schools may actually be the best place for some students, as all public schools are required to provide a free and appropriate public education (FAPE) as a result of the federal Individuals with Disabilities Education Improvement Act of 2004, or IDEA. Although a detailed discussion is outside the scope of this article, private schools are outside the scope of IDEA.

If your tween or teen is having a difficult time socially or if you have concerns about the "crowd" your child is hanging out with, you may consider private school as a solution, which it might be. Unfortunately, these issues are not unique to public schools. As you try to find the best fit for your student, consider having him or her shadow a current student for a full day, perhaps on multiple occasions if permitted.

Alternatives to private school

Depending on your needs, private school may not be the only solution. If your child’s needs have changed, are there any workarounds that don’t involve a private school tuition bill?

Athletics: Private athletic club teams can offer talented student athletes a top competitive environment. Some of these clubs can get rather expensive also, particularly if there's a lot of travel involved, but may still be worth running the numbers.

Charter schools: Investigate whether there are any charter schools in your area and how enrollment is granted. Some areas have a school choice program where residents of one town can attend the public school in another. If popular, these programs can close to new students, so it's best to get a head start when possible.

Move to another school district: If something has changed in the school system you're currently in, consider whether it may make sense to move to a new school district. Especially if you have a big family, it may not be realistic to send each child to private school. Although your housing costs and property taxes may increase following the move, how might this compare to the annual cost of private school? Work with your financial advisor to crunch the numbers, keeping in mind that mortgage interest and state, local, and property taxes are tax deductible (subject to IRS limits), which may help make moving more affordable. If you end up choosing private school, consider whether it still makes sense to live in an area with high property taxes when you're not taking advantage of the services.

How to figure out if you can afford to send your kids to private school

Ways to pay for private school

529 plans

Starting in 2018, parents will now be able to withdraw funds to pay for qualified expenses in K-12 private school too, up to $10,000 per year, per child. 529 plans are popular because participation is not phased out with income. Contributions are not tax deductible for federal income tax purposes, but can be withdrawn capital gains tax-free when used to pay for qualified expenses in K-12 private school or qualified college costs.

If you've been regularly saving in a 529 plan to pay for college, it may be tempting to use some of those funds to pay for private school. Before deciding on a course of action, there are a number of considerations to be aware of:

  • How may this impact your ability to meet your college funding goals? If there's a shortfall, are you comfortable with having your son or daughter take out some loans?
  • Depending on when you began saving in the 529 plan, you may not have significant investment growth. Consider whether you may be better served to keep those funds invested for another 4+ years until your student goes to college

Financial aid and scholarships

Each private school will have their own process and requirements for merit and need-based financial aid. Following the changes to the federal tax law permitting families to use 529 plan funds to help pay for private school, it is likely that some private schools may begin to assume at least a portion of these assets are "available" now, regardless of whether parents actually intend to use it. At least in the short term, this may further complicate the financial aid process.

Ask the school about the profile of a "typical" financial aid recipient (both merit and need-based) to get an idea of whether you might be a candidate. The actual formulas for need-based aid are rather complex, but if the school can help provide some indication as to the types of families who may qualify, it can help with your cost projections. Based on our experience, families with a household income greater than $100,000 typically do not qualify for need-based aid.

At the beginning of your research, talk to each school about what the total expected cost of attendance is. Some schools may have additional costs for trips, activities, books and supplies, or other fees that impact your bottom line.

Cash flows

Perhaps the most common way parents pay for "surprise" private school tuition is out of their regular cash flows; meaning essentially, they find a way to make it work. While paying out of regular income can be least disruptive to your overall financial situation, it may not leave you unscathed. For families with a high income and relatively low expenses, private school may not be much of a strain financially. However, in situations where there's not a whole lot "left" at the end of each month, taking on a major financial commitment doesn't leave much of a margin for error.

Loans

Unlike college, where students may benefit from federally subsidized loans or loans issued directly from a college or university, private high school does not offer these funding alternatives. While some lenders do offer loans geared towards paying for private school, this is an indication that private school (or this particular private school) may not be affordable within the constraints of your current financial situation. Strongly consider whether the projected benefits of attendance justify potentially over-leveraging yourself.

Another funding option is taking out a home equity line of credit (HELOC) to pay for private school. Even more so than a private bank loan, this is a particularly risky endeavor in many situations as you're putting your home on the line. Given the recent changes to the tax code, there are no longer tax benefits to this strategy. Now, unless proceeds of a HELOC or home equity loan are used to "buy, build or substantially improve the taxpayer’s home that secures the loan" the interest will no longer be tax deductible according to a letter from the IRS.

Other considerations

  • Logistics. Sending a child to private school may impact your life outside of the classroom, too. How will you arrange transportation to and from the school? Will you need to buy another car? Can you set up a carpool? What if your kids will be at schools in different towns?
  • More than one student. Perhaps you didn't expect to send your oldest child to private school... so what do you do if your younger kids want to follow suit? Although some schools offer a discount for multiple students, it likely won't be enough to offset additional "surprise" expenses.
  • Shop around. If a new school is a must and moving isn't an option, fully investigate all of the private schools in your area. The costs can range significantly between schools, and depending on your needs, you may find both institutions are equally suitable.
  • Impact on your other goals and overall financial situation. How might the decision to send a child to private school impact the other goals you're saving for? It may come as a surprise, but with the rising costs of both college and K-12 private education, paying for one (nevermind both) can make a significant impact on your retirement savings over the long-term. Consider whether a comprehensive financial plan may help you assess your options and how today's decisions may impact your family over time.

Giving your kids the best education - within the parameters of your financial situation

Differentiating needs from wants is particularly difficult for parents who may find it hard to say no to their children or may feel a strong need to give their child the “best” of everything. Since the vast majority of kids’ financial education comes through years of observing their parents’ relationship with money, it’s important to try and lead by example.

One issue many parents struggle with is education, and how to provide their child with the best one possible. Saving for college is a tremendous undertaking for many families, but parents usually plan for it. What is not typically planned is the decision to send a child to private school, which can put significant strain on a family’s financials (and retirement savings) for years to come. Without reserves, parents may need to reduce or even suspend further contributions to a retirement plan at work to cover the cost of private school. Even if you are able to make it work for all four years of high school, what about college?

If you have questions about whether private school may fit into your family's overall financial picture and wealth strategy, please contact us to schedule a complimentary consultation.  

About Darrow Wealth Management

In 1987, we began helping individuals and families invest in their future.  Now a predominantly female-run second generation family business, we are proud to have the opportunity to help multiple generations of families in the community achieve their wealth and lifestyle goals. Learn more.

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