You know it’s coming. One day, your little ray of sunshine will leave home, and college might well be in their future. With college costs spiraling, it’s more important than ever to have a full-fledged game plan to pay for it.
Sure, your child might not know whether they want to be a veterinarian, a fireman, an astronaut or an Olympic athlete just yet. But chances are your child will require some sort of post-secondary education to achieve their career goals. College savings plans can be used for more than just traditional four-year universities. And if they aren’t used at all, they can be transferred to another child.
It’s no secret that college and vocational training program prices are escalating, 7 percent on average for public in-state 4-year universities, according to the College Board Annual Survey. Saving when your child is very young allows your investments to keep up with rising costs.
It’s tempting to think your young scholar will be able to pay their own way through hard work and book smarts. Unfortunately, performance-based scholarships are increasingly rare, and often only cover a small percentage of the overall cost of college. Today, most financial aid is based on need, not GPA.
Colleges will take your investments and assets into account when making aid determinations. But not all investments are treated equally. In fact, a major benefit of a 529 College Savings Plan is the Asset Protection Allowance of around $20,000 (depending on the parent-owners’ age). If the value of the 529 plan exceeds $20,000 then your student’s financial aid will be reduced by 5.64 percent of the excess value. For example, if you exceed the allowance by $10,000 you could expect an aid reduction of $564. And, if your child is lucky enough to have a 529 owned by a grandparent, that isn’t included on the FAFSA at all. Just as you plan your investments to avoid taxes, you should work to minimize the bite college will take
It is well known that in-state tuition at comparable public institutions is almost invariably much lower than out-of-state tuition. But it isn’t always the case that public schools are cheaper than private schools. Yes, the “sticker price” at private colleges tends to be much higher than at public schools. But private schools tend to be much more generous with need-based aid. Many colleges even provide a financial aid calculator to give you a sense of what your actual costs will be.
Encourage your child to apply to five to 10 schools, aside from a handful of very selective schools, they need your child more than your child needs them. Having multiple offers on the table will allow you to drive a hard bargain when it comes to negotiating aid.
Saving and planning for college should be considered in light of your overall financial goals. Start the process early, and set expectations with your child about what is and isn’t feasible. You can even invite them to sit in with you and your financial adviser so they understand the realities of paying for school.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax adviser before investing.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on News Radio 830 WCCO on Sunday mornings. Email Bruce and Peg at email@example.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL.