Many parents and graduating seniors are making college decisions at this time of year, and a key part of the discussion often involves finances. Whether you’re thinking about payment and cost-savings strategies for your new college freshman or pondering the different savings options for a younger child, this article will give you some unique strategies and food for thought when it comes to financing a college education.
Tip 1: Consider a New Investment
If you have assets that need to be deployed and the local real estate market is attractive, consider purchasing an apartment or home for your child to live in rather than paying rent for an apartment or a dorm room. While you pay the mortgage on the property, your child can live rent free, and once they’ve finished college it might make sense to rent the property or even sell it. If you own a larger property, you could even generate rental income while your child is in school, which could make a property purchase an even more compelling investment.
Tip 2: Establish Residency
Out of state tuition is often incredibly expensive compared to in-state fees. If your child wants to go to an out-of-state school, consider having them move to that state for a year to establish residency. They can work or do other activities before starting college. Any money your child earns can also help to offset living expenses later on which could also provide an important lesson about saving and the cost of living. There might be other benefits as well; a gap year could give your child time to figure out what he or she wants to study which can bring more seriousness to the college experience and save time and tuition later on.
Tip 3: Utilize Federal Programs and Tax Breaks
While tax breaks and certain types of financial aid may not be available to every parent, there are still many programs that can help you build college savings and finance your child’s education. In particular, 529 savings plans carry tax benefits, as can tax credits such as the Lifetime Learning Credit and American Opportunity Tax Credit.
Another resource that many parents forget about is the availability of federal loans. While the loans with the most advantageous terms are reserved for those most in need, unsubsidized Stafford loans and PLUS loans generally have great terms compared to private loans and can help fill the gaps when it comes to paying tuition.
Tip 4: Keep Time Horizon in Mind
When planning for retirement, most people think on the scale of saving up for 20 to 30 years and drawing down assets for another 20 or 30. When it comes to saving for college, the time horizons are much smaller. Even if you start saving the day your child is born, you only have about 18 years to build up assets, and chances are that all or most of the money will be drawn down within about 4 years.
This means that you don’t have as much flexibility to ride out market downturns as you do with your retirement accounts. Thus, as your child approaches college, take time to transfer assets into less risky securities so that you can be sure that your savings will be ready when they’re needed.
Tip 5: Keep Inflation in Mind
While inflation in the economy is going nowhere, college tuitions are skyrocketing. Take this into account when planning your savings and payment strategies. Your expectations of cost in 10 years or even in 4 years may be a far cry from the reality. Your asset allocation can be an important part of preparing for fee inflation, so talk to your financial advisor about the best way to prepare.
Something to consider are pre-paid tuition plans, which allow you to pay for several years of tuition upfront. While it might be a burden in the short run, it could save you quite a lot over your child’s college career.
Tip 6: Don’t Forget About Scholarships
While many scholarships are need-based, there are a tremendous amount of scholarships out there for every activity and qualification imaginable. Take an active role in helping your child research and apply for scholarships and you may find that your tuition bill is significantly reduced as a result. For more information, check out my article on developing a Winning Strategy for College Scholarships.
Tip 7: Do Not Dip into Retirement Savings
Parents rightly want to do anything they can to help their children but raiding your retirement savings in order to meet tuition payments is not a good course of action. Dipping into retirement savings not only eliminates the gains from your previous contributions. It puts you in the dangerous position of having to fund your retirement with much less time to spare. This will not only affect the potential growth of your savings but could even force you to postpone retirement by several years. Furthermore, if you’re under 59.5 years of age, there is a 10 percent penalty to drawing down on retirement savings plans.
A simpler way to look at it is like this; you’ll never be able to get a retirement loan to help you retire, but you can very easily get a student loan if necessary.
Tip 8: Stop Procrastinating!
Procrastination is the single biggest mistake that parents make when it comes to building college savings and planning out a college spending strategy. Stop waiting, and start saving today. Even if setting money aside is something you’ve avoided for a long time, you are much better off starting a savings plan today than never starting it at all.
When it comes to paying for college, planning ahead (well before that first tuition bill comes!) will put you in a much better position when the bills start arriving. It gives your family plenty of time to prepare for the great transition and adventure of starting college.
To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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