Planning for College ExpensesSubmitted by Ascend Planning & Consulting LLC. on July 15th, 2019
Planning for College Expenses
Long considered a doorway to security and prosperity, college is now viewed as almost a minimum requirement for a promising career in today’s fast-paced economy.
Many parents see this as their last, largest, planned financial responsibility to prepare their children for independence. Now, it’s important to note that this means different things to each of us and is sometimes shaped by our own experiences. Think about what type of schooling you envision for your children. Depending on your values and your budget, this concept of financial responsibility may mean:
- “4 years of private college, plus grad school” — or —
- “4 years of public school” — or —
- “an education nest egg of X dollars” — or —
- “I’ll pay half, up to a limit of X dollars”
There is no right or wrong amount or philosophy. The point here is simply that you identify your goal — based on your own values — as a first step, so you can determine what target you are trying to hit.
So how to pay for it all? The most well-known choices for college funding include savings, scholarships, grants and loans. But, depending on your situation, these options may not be as abundant or attractive as you think.
Savings — It goes without saying that savings are important. But if you are counting on savings alone to cover tuition costs, you have to consider that college prices generally rise faster than the rate of inflation. Read first bullet.
Private Scholarships — There are private scholarships out there, but in the 2016-2017 school year, for instance, only 6% of undergraduate students were awarded these scholarships.
Pell Grants — Grants, too, are available, but many of the grants are awarded to families with incomes below $50,000 and the maximum Pell Grant for the 2017-2018 school year is $5,920. As incomes rise, the amount becomes smaller, if you are even eligible at all.
Loans — Loans may seem an attractive way to learn now and pay later. But using them as the primary source of college funding can make college even more expensive than it already is. Loans should be seen as a supplemental source, best entered into with good information and a clear sense of repayment terms.
Seem discouraging? It doesn’t have to be. The lesson here is to avoid relying too heavily on any of these options. Instead:
- Consider investing in a vehicle that may keep pace with inflation, such as tax-advantaged and high interest-bearing options.
- Think of scholarships and grants as “maybes.” In fact, when you are putting a college funding plan together, you may want to assume you won’t be the recipient of any form of grants. This will help prevent your investment plan from falling short.
- To avoid accumulating large debts and paying out additional money in interest, it is best to view loans as a last resort.
There are some education planning investments that can potentially help your money grow through compound interest and tax advantages. The most commonly used are
- UGMA/UTMA accounts, which are custodial accounts that enable minors to “own”
- Coverdell Education Savings Accounts — formerly called Education IRAs — which
are tax-advantaged investment accounts, and
- 529 Plans, which are investment plans that allow federal tax-free savings for college. The 2018 tax law changes may allow you to withdraw up to $10,000 per year from your 529 Plan to pay for K-12 education. Just remember, the more you use now, the less you may have remaining for college expenses.
Each of these types of accounts has advantages, limitations, effects on financial aid and effects on your estate. In addition, there are other strategies besides just these three.
If you have already set up a college funding strategy, now is a good time to review your plan of action. With all of the new tax laws, changes to education funding products, and market ups and downs, what might have been the best strategy a few years ago may be outdated at this point.
If you have not yet set up a college funding strategy, now is also a good time to begin evaluating those goals.
Finally, keep your education funding goals in perspective with your other financial needs. Like college, a secure retirement is costlier than ever before, with people spending more years in retirement and in a more active lifestyle. You’ll want to make sure you don’t plan for one goal at the expense of the other.
This is where professional guidance comes in. A professional can save you a lot of time and hassle, by helping to make sure that you are aware of all of your options, as well as the implications of each financial decision. The more you coordinate your overall planning picture — the easier it will be to reach your financial goals.
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Some things to consider as no college savings plan is perfect. Speak to your financial professional for details and which may fit your individual needs. College savings plans may charge an annual maintenance fee, administrative fees, and an investment fee based on a percentage of your account's total value. Prepaid tuition plans may charge an enrollment fee and various administrative fees.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in the issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.