First, the bad news. In the face of massive budget deficits, the government is cutting back on how much they are helping to subsidize college education. Even worse, college costs are increasing fast. The average public school now costs $7,605, while the average private one charges over $27,000. These costs continue to increase rapidly and some experts predict they will double within 10 years.
The good news? College is still one of the smartest investments to make for your kids. People holding a bachelor’s degree earn on average over $20,000 more each year than those with just high school diplomas. College grads are also a lot less likely to be unemployed. A college degree can easily pay for itself in less than a decade. Also, it’s more fun to be smarter.
So what can you do to put your kids on the right path?
1) Get an early start. No matter what age your child, start saving now. Putting off saving by just five years increases the required savings by almost 25 percent. Waiting until junior is in middle school almost doubles the amount you need to save each month.
2) Set up a 529 plan. It’s like free money! These college savings plans that allow you to deduct your contributions from federal taxes are offered by almost every state. But a little-known fact is that you don’t have to actually use the plan offered by your state to get the federal tax benefit. Why might you go with another state’s plan? Because it has lower expenses, allowing your money to grow faster over time. It also might have a smaller minimum investment requirement, and simply be easier to use.
One caveat: Some states won’t allow you to deduct contributions against state income taxes if you use a 529 plan in another state. Some states, though, will. But even if your own state does not, getting a low-expense plan from another state will potentially put you in a better position over time. At Veritat Advisors, we sometimes recommend Iowa’s plan, depending on your individual circumstances.
3) Maximize the amount of grants and student aid your child can get. This is especially crucial, since educational loans and grants are decreasing. But you need to know three key rules.
First, pay off your credit cards and mortgages. Why? When determining your financial aid, schools look at your assets, not your net worth (i.e., assets minus debt). So if you have some extra cash sitting around, by paying off debt you’re reducing your assets, but not your net worth. In other words, paying off debt puts you in a better position to receive financial aid.
Next, avoid taking retirement distributions (that is, dipping into your retirement fund). Retirement assets are not counted when determining financial aid. So keep your money in your retirement accounts as long as legally possible.
Finally, play the inter-generational trading game: In general, a student’s assets and income are penalized more heavily in financial aid calculations than the parents’ resources. The grandparents’ stuff is ignored altogether. So, spend down student’s resources first before your own. You can get more details in the white paper referenced below.
4) Snag a good loan. Borrowing money for college is not a sin. It’s a better investment than a car, house, and a lot of other things that people borrow for. A Stafford loan is your first choice. Then use a PLUS loan if you need more money. But don’t rely on just loans because the borrowing rates are often pretty steep. Unlike credit card debt, though, interest on education loans are typically tax deductible. That reduces your true comparable interest rate.
5) Shop for a better price on college. Yes, you can price compare when it comes to schools. Ivy League schools never sell themselves at bargain-basement prices. But there are terrific regional schools like Emory in Atlanta or Case Western Reserve in Ohio that offer a great education for a lower price.
But one of the best-kept secrets is that you can get a really good deal at a public school if your kid really hits the books. I did my undergraduate at Ohio State and worked hard. Afterward, I was able to get into a highly selective PhD program at Harvard. It can be done. In the white paper referenced below, I also talk about the pros and cons of using a community college to reduce the tuition for the first couple years.
6) Don’t forget that kids can chip in. After all, it’s their future. Plus, conventional wisdom that people value what they pay for is actually true. If you still want to help, then do so smartly. I discuss possible approaches in the white paper.
7) Utilize “Plan B.” If you happen to have a lot of money sitting your retirement accounts by the time your kid heads to college, you can use it for qualified educational expenses. However, this isn’t ideal — how do you recoup that nest egg? So don’t plan for this scenario. I discuss in more detail the pros and cons in the white paper.
The bottom line: College is expensive, but still a terrific investment for the serious student. You really can make it happen for your kids if you get started today.