There’s no getting around it – a college education is an expensive proposition these days says Paul Haarman.
These 7 tips can help you start planning early and give your child an advantage in the world of higher education.
1. Start early with a 529 plan
College savings plans are one of the best ways to save for college. Not only do most states offer at least one type of 529 savings plan, but some employers also provide private 529 plans as part of their benefits package. There are several types on the market today; I’d be happy to help you understand which might be right for you if you’re not sure (contact me here).
2. Don’t forget about financial aid
Your savings can hurt your eligibility for need-based financial aid if they impact your adjusted gross income (AGI). A portion of contributions made to traditional IRA, 401k, and similar types of accounts is considered a resource that must be reported on the FAFSA. If you’re self-employed or your employer doesn’t offer a retirement plan, then you can leave these funds in your taxable accounts because they don’t need to be included on the FAFSA explains Paul Haarman. It’s important to consider the timing of withdrawals when saving for college; try not to touch your investments in tax-advantaged accounts until you anticipate applying for financial aid.
3. Contribute to an account in both parent’s names
A 529 plan owned by either parent can be used for qualified higher education expenses at any eligible school in the country (or even abroad). But if you want to determine who gets control over how much is saved, you need to make the account owner(s) different from the person(s) who will use the funds. For example, if your child is a junior in high school and college seems many years away, consider naming yourself as beneficiary on an account owned by both of you in case anything happens in between now and when he or she applies.
4. Don’t assume that you have to exhaust all other forms of financial aid before tapping 529 plans
Some people mistakenly think they won’t qualify for financial aid until they tap their 529 plan or Coverdell Educational Savings Accounts (ESAs). But I’ve helped families receive thousands of dollars each year through assorted types of financial aid including grants, work-study programs, scholarships, and student loans.
5. Understand how financial aid is awarded
It’s critically important to understand what types of aid are available and how they’re awarded so you can know if the money might be applied toward your child’s education costs by reducing other forms of financial aid (such as student loans). For example, scholarships (often called gift aid) don’t need to be repaid while grants and work-study funds might need to be repaid; whether or not the amount must be repay depends on your specific circumstances. You can learn more about gift aid here.
6. Get the right expectations when saving for college
Many people (including some financial planners) say college should cost no more than $25,000-$35,000 per year for a public university says Paul Haarman. But given the significant increase in college costs, I don’t recommend using this benchmark to determine how much you should save – it’s better to use calculators designed to help you project what you might need based on your own specific situation. It’s also important to realize there are all types of colleges out there; some will be more expensive than others while some might offer more financial aid than others. Depending on the parents’ particular situation.
7. Plan for your child’s education even if he or she chooses not go on to college
One of the biggest mistakes I see is parents who plan for only one outcome. Namely that their child goes onto higher education after high school says Paul Haarman. Although that may seem like an obvious choice. It might not be in your child’s best interest if he or she has a strong interest in a trade, doesn’t enjoy school. Wants to start working at a young age, or simply doesn’t want to go onto higher education. A mistake I’ve also seen is parents planning for only one type of college degree (such as a bachelor’s degree from a four-year university). When their child may have greater opportunities with an associate’s degree. From a community college that leads to better employment prospects.
Whatever you do, don’t assume higher education is the best path forward for your child. Consider all options and discuss it with your family before moving ahead.