Successful College Planning
By: Kate Hennessy
College is one of life’s most important – and expensive investment goals. As a parent of two grade school kids, I know that their heading to college will be here faster than I think it will be. With most pre-college children heading back to school this month, we thought it would be appropriate to talk about pre-paying for one of life’s biggest expenses… college. In this article we talk about the importance of understanding the costs of college, what to expect from financial aid, and how to make the most of your tax-advantaged 529 plans.
- Understand the Costs – the total cost for your child to attend college is high today and is likely to only increase further in the future. Annual tuition inflation is outpacing the overall cost of living. At AssetGrade, our investment models assume that college costs will increase every year and we build this into our client’s funding schedules. It’s important to start your plan with a funding goal and then calculate how much you plan to pay and how much may come from financial aid and family gifts.
- Know What to Expect from Financial Aid - many families expect more financial aid then they are actually likely to receive
- 50% of college students get grants and scholarships but only 0.3% receive enough for a free ride to college.
- Grants pay an average of 11% of the costs at a four-year public university and scholarships cover just 12% of the costs.
- Families need a thought-out investment plan to make up the difference between grants/scholarships and actual costs if they want to avoid taking out expensive loans or ruling out schools simply because of cost.
- It’s a myth that investing for college will hurt your chances for financial aid. This area can get quite complicated – the key rule of thumb is that retirement plans (e.g., 401ks or IRAs) and 529 plans are good because they have a reduced, or even no impact, on financial aid calculations.
- Make the Most of Your 529 Plans – with a 529 plan, investment earnings and withdrawals are tax free when used to pay qualified education expenses. Many states allow investors to deduct a portion of their 529 plan contributions, which enables investors to save even more in taxes. Contributions of $15,000/year/person can be made without any gift tax, so parents can contribute a total of $30,000/year to each child’s 529 plan, if they are able to. In addition, 529 plan gifts and investment earnings are removed from the donor’s estate. This can help grandparents and others to invest for a family member’s college cost while also reducing their estate taxes. Even if your child decides not to go to college or trade school, other options exist for the tax-free use of the money. However, I don’t recommend cashing out as you will pay income taxes plus a 10% penalty on the earnings.
It’s important to start your college funding plan with a specific goal and then stick to the plan. Educate yourself on expected college costs, on how much you wish to pay and on financial aid and the reality of what’s available. Lastly, make the most of your 529 plans and start contributing early. Saving for your child’s future does not have to be overwhelming!