The rising cost of higher education is enough to put any parent on edge, but our friends at Parent Financial shared a few tips for making the most out of your college savings plans (and potential financial aid). Court Creeden, founder and financial advisor, told us planning for college is slightly more complex than just socking money away into a savings account. Here are some strategies he shared:
- Make sure you have a clear picture of all your household expenses. You may be trying to start your newborn off on the right foot by putting away money for college as soon as you get her home from the hospital, but make sure you understand the impact. Court said some couples set up auto-drafts to put money into their kids’ college funds — and then have to use a credit card to pay their bills some months because they don’t have the cash. Your child’s education fund can’t come at the expense of other household obligations.
- Keep your retirement fund your primary goal. “There’s no scholarship for retirement, and there’s no other way to get the funds if you make it to 65 or 70 and you paid for your child to go to school but didn’t save anything for yourself,” Court said. He compared it to the airplane emergency drill: you have to put the oxygen mask on yourself before you help your child. Same goes for smart savings. Consider this: if you’re 50 when you spend $70,000 for your child to go to a public in-state school, and then you retire 15 years later, you essentially decreased your portfolio by $250,000. If you keep it in your retirement fund and your child graduates with loans, you may be in a position to pay them back, plus more. Court and the folks at Parent Financial can help you determine the impact of putting aside money, and the reasons for putting it in specific accounts.
- Know the specifics of what you’re saving for. Are you working toward having enough money to send your child to an in-state school, or a private college? The cost differences are obviously huge. Court says a good first step in college saving is to decide how much you’re willing to cover.
- Know the pros and cons of different accounts.
• It’s common for parents to save college funds in a 529 account, which won’t charge taxes on any gains as long as the funds are used for higher education. The downside is that if you don’t use the money for college (for example, if your child gets a full scholarship and you don’t need it), you’ll pay a penalty and owe taxes on any gains. Money in a 529 can also count against you when you file for financial aid. Court suggests asking grandparents to consider holding onto college savings gifts and investing those funds in their name so the assets don’t get added to your financial picture. They can access their savings to help cover tuition, or when your child graduates, the grandparents can then gift the funds to help pay off any potential student debt that was accrued.
• Many parents consider putting college savings in a Roth IRA, which won’t count against them when their child applies for financial aids. As long as the money has been in the Roth IRA for at least five years, it can be accessed without taxes or penalties in the future. Another option is a brokerage account in the parents’ names. Although you’d have to pay a capital gains tax on any gains, you won’t have to pay penalties if, for example, your child gets a scholarship and you don’t have to use the money for higher education. - Be strategic with your money before you apply for financial aid. When your child is in high school, Court suggests checking on your assets to see if they’ll count against you when your child applies for aid.
• For example, if you have $50,000 in mutual funds, colleges could look at that as money you could use for school since it’s not in a retirement account. Shifting money from non-retirement accounts into retirement accounts could help your child qualify for more aid.
• Does your child have a large amount of money in his/her name? Court says money sitting in a child’s name will count roughly 14 percent more against you than if that same dollar were in the parents’ name. If your child has a large savings account, you may want to move that cash into the 529 before you apply for aid.
Financial Aid 101
Court and the folks at Parent Financial can help clients determine if they qualify for financial aid (couples who make less than $180,000 a year probably do) and if your money is positioned in the most advantageous way possible. Here are a few things you should know:
• In North Carolina, the FAFSA (Free Application for Federal Student Aid) is first-come, first-serve. That means people who have it done immediately and correctly will move to the front of the line. That’s why it’s crucial to fill it out correctly. If you mess up the address or put single rather than married, for example, your application goes to the back of the line. You also need to fill it out as soon as possible — January is filing time. Court suggests filling out the application online rather than printing it out. The website has a wizard that will help you.
• When filling out the FAFSA, be sure to enter $0 for any fields that you don’t have money in (farm land, for example), rather than just leaving them blank. Too many blanks can mess up the system.
• January is the filing deadline for FAFSA, but many people haven’t gotten their taxes back at that time. However, President Obama passed an executive order for 2017 allowing you to go back two years and use your previous taxes if you haven’t gotten this year’s back yet. This year, opening day was October 1 using 2015 information.
• Make sure you truly understand the aid package your child’s schools of choice put together. For example, if your child is accepted to Duke University, they’ll come up with an aid package that’s close to 100 percent of what you qualify for. At some schools that number is closer to 50 percent. Court says not to get stuck on the “sticker price” for your chosen school — a more expensive school might offer more aid.
Looking for more specific answers to your questions about college savings? Contact Parent Financial to set up an appointment.
Meet our expert:
Court Creeden is the founder of Parent Financial, a boutique financial planning firm that provides comprehensive financial planning for parents. Parent Financial helps busy parents come up with a clear plan for their family in the areas of insurance, college planning, investments and estate planning. Parent Financial has advisors in Charlotte, Charleston and Greenville. Court has been featured in the Wall Street Journal, MSN Money, Dow Jones, Time and countless parenting articles for his work with parents.
Securities, investment advisory services and financial planning offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6000 Fairview Road, Suite 400, Charlotte, NC 28210. 704-557-9610. Parent Financial is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies.
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