The thermometer tells us it is still solidly summer, but our calendar tells us the slow days of summer are numbered and fall is just around the corner. For many families fall is a time of transition back to colleges near and far.
The Dictionary of Catch Phrases defines “Giving It The Old College Try” as doing one’s utmost, though success is uncertain. Considering the backdrop of several challenging years in the financial and employment markets, many are feeling less certain about being able to fully pay for the perpetually rising costs of college, but are nonetheless “giving it the old college try.”
Sources of Funding
While it can be concerning to see the value of your college savings fluctuate, just remember, college funding plans usually involve more than simply saving. Funding strategies are often a mix of parent and grandparent savings, student loans, student work, borrowing, financial aid, scholarships (hopefully), and cash flow funding during college.
Savings Strategies
The 529 college savings plans continue to be one of the best college funding vehicles available. College Savings accounts are easy to open, have a good selection of high quality, low cost, investments and accumulate tax free if used for “qualified higher education expenses.”
These savings plans have some unique attributes that are important to understand. The person that opens the 529 account is considered the “owner.” The owner selects the future college student as the “beneficiary.” The owner has the ability to change the beneficiary at any time. This can be helpful if the beneficiary earns a scholarship or decides not to go to college. If the account owner has unforeseen financial needs, contributions to the account can be withdrawn without federal taxes or penalties and only the growth in the account is subject to income taxes and a 10% penalty.
Depending on your state’s rules and the 529 plan chosen, the account owner may qualify to take a deduction on their state tax return.
A 529 plan won’t meet all your college savings needs. Some portion of college costs such as apartment rentals are not considered “qualified higher education expenses.” A regular savings or brokerage account should be opened to save for non-qualified expenses. If the student might qualify for financial aid, don’t title accounts in the name of the student. The financial aid formula weighs assets in the student’s name more heavily than assets in the parents’ names and can result in lower available financial aid.
Off to College, Now What? Funding from Cash Flow & Borrowing
Some portion of college expenses may need to come from monthly cash flow during the years your student is in college. Try setting up your mortgage or other significant debts to be paid off before the student begins school. The funds previously used for the mortgage payment can be redirected toward college expenses with minimal disruption in household cash flow. Don’t forget that any cash flow currently allocated to pay high school tuition can also be redirected towards college costs.
If grandparents or other family members would like to pay for tuition while the student is in school, they should make their payments directly to the college so that their gifts are excluded from gift tax calculations.
Don’t overlook your student’s contribution toward their college costs. While minimum wage doesn’t go very far compared to tuition bills, a well communicated expectation that the student will be responsible for a portion of their educational expenses can pay big dividends. With a little financial pressure, the student may find co-op opportunities, scholarships or work study programs that would have previously gone unnoticed and are great resume builders.
If college savings and cash flow contributions aren’t enough, it is time to look into other options. It may make sense to attempt to dial back college costs and revisit the chosen college’s “value proposition.” Does it make sense to switch from an out-of-state private college to an in-state public college or community college?
Once the college costs are known it’s time to examine borrowing options. Look into your student’s borrowing opportunities first. Many times these loans will have low or deferred interest rates that will be preferable to parental loans. Once the student loan opportunities have been exhausted, the next best sources of financing may be a mortgage refinance, home equity loan or loans from 401k accounts. Excessive borrowing from these sources can have serious, negative, long-lasting effects on your financial security and should be carefully considered in the context of your comprehensive financial plan.
There are many college funding strategies that may be appropriate based on your unique financial situation. Give us a call and we can work together and “give it the old college try!”