College Planning 101
Posted May 2016.
Most parents have already heard the bad news: a college education has never been more expensive. Many, in fact, are still paying off their own student debt and would like their children to avoid that burden. The good news is that there’s a lot parents can do to help their children and make the costs of college more manageable.
1. Invest in a Tax-Advantaged 529 Account
The 529 account is an education savings account and it’s a fantastic deal to save for education expenses for a child, grandchild, or even yourself. Though contributions to 529s are not tax deductible, the account’s earnings are not taxed when you use the money for qualified education expenses – things like tuition, books and even room and board. Start automatic deposits from your paycheck when your child is young and you could have a substantial nest egg when she’s ready for college.
2. Apply for Financial Aid
You have to be poor to receive financial aid for college, right? Wrong! While many scholarships and grants are needs-based, many other financial aid opportunities are merit-based. So, if your child does well academically, or meets other specialized criteria, she may qualify for assistance even if you are affluent. For example, many colleges and universities have endowments and use this “institutional aid” to attract promising students – and not just athletes — to their programs.
When exploring your options, keep an eye out for scammers. While there are reputable college financial planners, no legitimate scholarship program will require students to pay to apply for aid. And, of course, be wary of any college funding strategy or investment that sounds good to be true!
3. Explore Local Community Colleges
Academically-speaking, community colleges offer a phenomenal value for meeting almost any degree program’s general education requirements. Plus, students at community colleges often benefit from close teacher-to-student ratios, while many university and four-year college GE classes aren’t even taught by full-time faculty. There are also huge savings on room and board when a child attends a local institution and can continue living with mom and dad. Just remember to investigate requirements for transfer students to ensure that preparatory coursework will be accepted by the student’s chosen degree program.
4. Borrow Sensibly
Even with financial aid and parental support, many students will still need to take out loans to pay for college. The key is to limit borrowing to an amount the student can reasonably be expected to pay back in ten years or less. The lower the loan amount, the better, but a good rule of thumb is to borrow no more than the expected first year’s salary.
5. Let Your Child Have Skin in the Game
If the money’s there to pay all of your child’s college expenses, it’s all good. However, parents who skimp on critical goals — like saving for their own retirement – to pay for a child’s education, may never recover from the financial hit. Remember, your child can pay for college with a combination of student loans and work earnings, but you can’t get a “retirement” loan to pay expenses when you’re no longer working!