When you read the title, did your heart rate tick up just a bit? If it did, you are not alone. Parents all over the world deal with the stresses of educating their children. And one of the biggest hurdles is how to fund the ever-costly college years, especially when the cost of college has been increasing steadily by 5.1% annually since 1990!
However, before thinking about the cost of college and which funding strategy is best, parents should evaluate how they feel about college. What do I mean by that? Parents should ask themselves first if they plan for their child to go to college. Do you prefer they go to a trade school? Will the military be an option? Do you believe that you should pay for your children’s school or will they work while they are in school and fund part or all of their own tuition? Do you want to forego your retirement plans for their education? The first step of your college funding plan is to figure out your family’s personal views, beliefs, and goals regarding higher education as that will determine the best plan for your situation.
Now that you know what you want to accomplish, find the most appropriate vehicle to meet those goals. Some of the popular ways to save are Coverdell ESA’s, 529 Plans, Custodial Accounts and Universal Life Insurance. Without diving into the details, all of these various accounts have certain benefits that can help you build that college nest egg and stretch your dollars further as you work to accumulate funds. While relatively straight forward, the above options should be evaluated and researched so that you build funds in the most efficient way for you. Done in isolation, this could prove difficult, which is why we advocate that our clients discuss these scenarios with us prior to implementation. All too often the product landscape is riddled with all of the benefits, but neglects to mention potential pitfalls. It’s best to gather all the details before committing to any specific product.
Once you identify what tools are best for you, then you want to focus on a plan for your contributions. These contributions should fit within your budget, and ideally do not come at the expense of other family savings, such as personal retirement or emergency funds. Consistency and an early start will have the greatest impact on achieving your goals. The longer you delay, the more work and funding is needed to reach the same destination.
Now that we have goals, tools and a plan to save, what should you watch out for along the way? Depending on when your child will get to college, realize that many rules are likely to change between now and then. From admission programs to tax incentives, FAFSA forms and financial aid all will likely have some different tweaks by the time your child steps onto campus for the first time.
Considering things will change over time, make sure you avoid some of the common pitfalls when it comes to applying and funding that college goal:
FILL OUT THE FAFSA:
Many families assume they will not qualify for aid. In fact, most families with income ranging from $75k to $600K per year can be eligible for some sort of financial aid. There are 30 billion aid dollars available each year, and there are resources to help you identify the aid that fits your circumstances. The FAFSA (Free Application for Federal Student Aid) is a universal document to apply for this aid so we recommend taking the time to fill one out every year.
PLACING TOO MANY ASSETS IN CHILD’S NAME:
When applying for aid, be aware that assets of the child receive a higher expected contribution. Simply meaning that the child would be expected to use more of their funds for school cost versus assets that are held by the parent or in a 529 plan.
NOT ALL SCHOOLS ARE CREATED EQUAL:
There are various aid and merit packages depending on the school. Some schools are well-endowed and get a lot of money from alumni and corporations. These schools have more money to give out and are generally able to meet most or all of a student’s financial need. Other schools, like state universities, get no private funds and rely solely on state and federal funds to help fill the students’ need.
WAITING TOO LONG:
The longer you delay the more difficult it will be to map out a strategy for receiving financial aid, be it needs-based or merit-based. Planning for funding and researching your potential for aid should begin as early as a child’s sophomore year. This gives you the most amount of opportunity to reposition assets if necessary and research the potential schools that offer the best package for your situation.
Now that you are armed with the 30,000-foot view of the college road map, what are your resources?
Depending on where you are in the cycle, newborn, toddler, middle school or high school - your first step should be to consult with your financial advisor. We are tasked with providing the best funding strategies for your situation and can provide the initial step in building your funding plan.
If you are halfway through high school, the best thing a parent can do is research and arm themselves with all the free information you have available to you. Go to your child’s school and speak with their guidance counselors. These days all schools have a multitude of free resources and educational programs for parents to find the best programs and schools for their child. Additionally, if you have identified some potential schools that would be a good fit, reach out to those schools and engage their counselors and financial aid departments for information.
While college is an expensive endeavor, know that the schools are not stacked against you. Provided that your child meets acceptance criteria, there are schools that will go the extra mile for them. They have a financial interest in your child, and they need you as much as you need them to continue to provide a safe and thriving environment for your child to pursue their higher education goals.
Penniall & Associates and our advisors are always here to answer questions and be a valuable resource for you and your family. We look forward to providing thoughtful advice and clarity to a topic that is often daunting and complex.
Written by Alex Leu, Wealth Manager / Managing Director