As most parents already know, a four-year college degree is expensive. So it’s understandable that planning for this expense can lead to high levels of stress and anxiety. Yet today, more than ever, parents are understandably concerned with the importance of a college education. While there’s no silver bullet when planning for college, there are a number of strategies you can get started with right now.
529 College Savings Plan
First is the 529 college savings plan. 529 plans generally offer simple, tax-advantaged ways to save money for college. Most, if not all, states have their own version of a 529 plan, and often times, you can either work through a broker-sold plan or choose the do-it-yourself investor option commonly referred to as a “direct-sold” plan. 529 plans can vary widely in cost, so look for those that use low-cost investment providers. With that said, don’t discount the value of state tax deductions! All too often investors flee to another state’s 529 plan and give up potential state tax benefits. Depending on the circumstances, the state tax deduction may be a better deal than the lower costs associated with another state’s 529 plan.
Finally, a word on investments – almost all 529 plans offer “age-based” investment options, which gradually move your assets to a more conservative allocation as your child reaches college age. Using this investment structure can make the lower cost, do-it-yourself direct-sold plan a great choice for many parents.
A word of caution when it comes to 529 plans: the money may be tax-free only if the funds are used for qualified college expenses. If your child earns a scholarship or decides to attend a lower-cost school, you could be left with a large 529 plan balance and no educational expenses. While it’s generally true that the beneficiary of a 529 plan can be changed, fully funding all educational expenses through a 529 plan may not be the optimal strategy. Putting some savings in an ordinary savings account allows for flexibility if plans change – everything in moderation.
Next in line for funding college expenses: financial aid. Parents should strongly consider filling out the Free Application for Federal Student Aid (“FAFSA”) form. Parents who do not fill out the FAFSA often don’t do so because they feel their income is too high to qualify for benefits. Even if you don’t expect to receive “needs-based” aid, filling out the FAFSA can give you access to Stafford loans which are generally available to full-time students. And there are a number of situations in which you might be surprised to find potential grant money. Higher tuition costs from private universities, parental divorce or multiple children in school are but a number of situations that could lead to grants or subsidized loans (loans which you generally don’t pay interest while enrolled in school).
Finally, one of the most proactive ways parents can plan for educational costs is to be upfront with their children that college expenses are a two-way street. College is a time for students to prepare for their desired career and build relationships, but it’s also an opportunity for them to learn fiscal responsibility. Despite what some young adults might think, “budget” isn’t a dirty word, and they could benefit from your guidance in setting realistic spending expectations on living expenses such as rent, cable and food. Young adults can also look into opportunities for part-time employment, which may provide a little cash for the weekends while also instilling life-long financial lessons and values.
Planning early for college expenses is important. Small steps today, such as saving into a 529 plan, can provide you and your children a leg up when deciding to pursue a higher education.