Mary Lynn Dahl
(SitNews) Ketchikan, Alaska - Every fall parents of high school students all over the nation face the dreaded Free Application for Federal Student Aid (FAFSA) application. Currently applications are accepted from October 1 through June 30, 2018. The purpose of this application is to secure the best chance of getting financial aid for college and the early bird usually gets the worm. The FAFSA is a form used to determine how much, if any, a student may get in financial aid for college. It is the starting point for all types of grants, scholarships and financial aid programs throughout the entire US college system. Most high schools offer some basic assistance to parents or guardians who need help filling out the FAFSA form, but even with help, it can be daunting for many people. So much so that every now and then, we get requests from clients to assist them with the form and from this experience over many years, I can attest to the truth that this form is not easy to complete, but it is necessary. By the time you complete the FAFSA, you are definitely able to apply for financial aid in its various packages, and that is a good start to a college funding plan. For more information go to www.fafsa.ed.gov.
With this in mind, let’s review the choices available for college funding. The place to start is shortly after your child, or grandchild, is born.
On average, most students start college at about 18 years of age. Therefore, if you started a college funding plan at birth, you would have 18 years to accumulate enough money to pay for a 4 year degree. For example, a college fund that started with annual contributions of only $2,000 per year at the beginning of each year, for 18 years, with an average annual return of 6%, would be worth $65,520 by the time the student started his/her freshman year of college. Non-profit organizations that track college costs in the US say that the average cost for a public university, in-state resident student, is slightly under $10,000 per year currently. That is for tuition and books only; note that this does not include room, board and personal expenses like a car and clothing. Depending on how frugal the student is or is not, those expenses can double the cost for each year of college.
Maybe your student is not a newborn, and you have some catching up to do in order to have enough set aside for his/her college. If you wait until the student is 5 to begin saving and investing for college, you would have to contribute $3,250 per year for 13 years at an average annual return of 6%. Or, waiting until he/she is 10 would increase the annual amount required to $6,250, and so on. The longer you wait to start a college funding plan, the more you will have to contribute to that plan annually. So, the starting point in this conversation is to start as early as possible.
The next question is to identify the kinds of financial aid programs available. Financial aid varies from college to college. It often depends on the kind of degree the student is pursuing. For example, a college may emphasize their own programs in engineering degrees and therefore have more financial aid for students in those degree programs. For this reason, it is very helpful if you know what areas of study your student will concentrate on, in advance of starting school. While many colleges do have financial aid programs for liberal arts degrees, many are more geared to a specific degree, such as political science, business, pre medicine, computer science and other specialized or technical degrees. A student attending a college with this kind of focus should realize that it may not offer much financial aid for a liberal arts, English, history or music/arts degree.
So, while step #1 is to start early, step #2 is to identify an area of study that interests your student and match that to colleges offering degree programs in that area of study. You are likely to find that they will have more generous financial aid packages in degrees your student is seeking. The problem, however, is that many kids start college with absolutely no idea of what areas of study interest them.
At this point, I should point out an obvious issue. A student entering college with no degree goal and no specific areas of interest is probably not ready for college. Maybe it is advisable for this student to work for a year or two to mature and explore potential career paths he/she may be interested in following. This often leads to a better focus in class, better grades, less wasted tuition expense and more satisfaction for the student. It is certainly not a negative sign for a student to take some time after high school to work and mature before entering college. Far too many kids enter their freshman year of college without a goal, other than partying and hanging out with friends. Avoid this mistake and reduce your college costs at the same time by directing your student to explore their own educational and career goals prior to starting college.
Once you know your student is ready, what kinds of financial aid packages are actually available? For starters, there are grants, loans, job study programs and scholarships. Some scholarships are based on financial need and others are academic based. Loans are simply that, a loan that must be repaid, usually over period of years after graduation. Some loans are forgiven if the graduating student works in a job provided by an employer who guarantees the loan. The number of years of employment varies by job and employer, but often it is 5-10 years. For some graduates, this is ideal, but for others, this is too great a sacrifice if they want to move up in a career faster than this will allow. Grants are based on financial need and can be awarded more than once. Financial aid is often packaged in a combination of grants, work study, scholarship and loans, so it is important to explore all of these potential sources of funding. Students with military service can often get a lot of financial aid from the government, sometimes enough to pay all of the costs of tuition and books, sometimes even a small stipend on which to live as well. In many cases, the student who joins the military, does his or her service duty, gets out and enrolls in college can receive a very generous financial aid package, making their military service a path to a college degree at the same time that it helps the student mature and focus better on their education.
Finally, there is the old-fashioned way to pay for college, working while going to school. Students who work their way through school generally take a year or two longer to get that degree, but most are very focused and tend to do very well academically. Perhaps that is because they are so invested in their own success. Whatever the reason, working while going to college is sometimes a very good option for the more mature student.
If you do not want to rely on trying to get financial aid, you will need to either pay out of pocket or set up a college fund for your student. If you do this, what types of plans are available and what kinds of investment choices can you choose from ?
College fund plans are 529 plans, education savings accounts, uniform gift to minor accounts and ordinary investment funds, all of which are choices for a parent or guardian to consider for college fund investments. The key with all of these is what fees you will pay with each one and the types of investments you can choose from. The two factors will determine the overall success of your efforts to accumulate enough to fully fund college for your student.
Paying too much in fees is a big concern for any investment plan, including a college fund account. You have to ask the question “What are the fees associated with this investment?” The salesperson, if there is one representing the investment, is required to disclose the fees, his or her compensation, any conflicts of interest that exist and put this all in writing, before you agree to the investment for your college fund plan.
Of all the ways to save and invest for college, a 529 plan is the most popular, for a lot of reasons. It is specifically designed to meet the needs of a family who wants to contribute to a college fund account for their student(s). Whoever sets up the 529 plan account owns the account, usually the parent. The student does not own it, so the student has no control over the funds at any time. This is plus and a major advantage of a 529 plan.
529 plans are offered by each state, by investment firms and mutual funds and through financial advisor firms. There is a lot of variation among 529 plans, though. Some are much better than others. In my own research and advice to clients, I concluded that among the 529 plans offered by each state, the best ones had the lowest fees, the most flexibility and the widest range of no-load and low fee investment choices.
The 529 plans offered by the states of Alaska and Colorado scored the best in my research, offered the most flexibility and charged the least in fees of all state plans. The Washington State 529 plan, called GET, scored the worst, and had to be shut down by the state because it tried to guarantee the plan benefits but failed to do so, resulting in it having to refund contributions made to it over a number of years. All 529 plans have the same tax benefits, basic plan provisions and contribution limits, so choosing among them does boil down to paying the lowest in fees, getting the best investment choices and having the most flexibility in plan benefits.
In brief, a 529 plan allows the parent or guardian to set up the account, make or accept contributions (anyone can make contributions) to it until the student starts college, share the money between more than one student (for educational purposes only), pay no taxes on withdrawals, assuming the withdrawals are for educational expenses only. The reasons that 529 plans are more popular than other ways to accumulate for college are the tax-deferred growth, the tax –free withdrawals that are allowed, the flexibility to use the funds for more than one student and the large amounts that can be contributed by anyone, up to $400,000 in some cases and the fact that most states allow you to deduct the amounts you contribute on your state income tax return. In addition, you, as owner of the 529 plan (not the student) have full and complete control of the plan, the funds, the contributions, the tax benefits and the withdrawals.
Because most mutual fund companies offer 529 plans, there are a lot of differences in the quality of the investments in the plan of each fund company. 529 plans offered by mutual funds and investment firms that use salespeople to sell the plan cost more in fees, fund expenses and sales commissions. The best plans are with states and mutual funds that offer “no-load” investments. These are funds in which you do not pay a sales commission, high fees or both to a sales person who offers the investments to you. Sticking with no-load mutual funds and state plans with low fees is far more advantageous than setting up a 529 plan with a broker or salesperson who is selling 529 plans through his or her firm.
There are many web sites that offer unbiased advise and provide calculators you can use to figure out how much you should be contributing, what tax advantages are provided and what sort of dollars are likely to be accumulated over a specific number of years. I cannot name these funds in this article, but a little research on your part, in a search of state plans and no-load mutual funds that offer 529 plans, will give you plenty of places to crunch some numbers and get a clear picture of how much you can accumulate for your college fund account over a specific number of years. Doing this takes a lot of the pain out of the whole process of paying for college.
Finally, a question that I often get from parents interested in building a college fund for their kids is the following: “If I have to choose between contributing to my own retirement fund and a college fund for my child, which one should I choose?” My answer is that if you have a 401-k plan at work, contribute the max to it first and calculate the amount of taxes you do not pay as a result of the tax deduction you get from participating in the 401-k plan. Use that tax savings to contribute to the college fund. If you have a deductible IRA, do the same thing. In each case, you lower your taxes, so use the tax savings to fund college costs. It won’t be enough to cover all the costs of college, but it will be better than nothing. Over time, this is very productive; it does work. If you do not have a 401-k plan or deductible IRA, concentrate on your own retirement before contributing to a college fund. Do not sacrifice your retirement in order to pay for college for your student. When the time comes, seek financial aid and allow your student to work while going to college. For many kids, this is the best way for them to get that education anyway, so don’t hesitate to ask for financial aid and let your student work. Fill out that FAFSA form and send it in as early as possible during the Oct 1 – June 30 timeline. Good luck!
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©2017 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2017
Mary Lynn Dahl can be reached at firstname.lastname@example.org
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