Which Federal Tax Breaks Still Apply To College Costs?

May 01, 2023

When it comes to education, most financial planning centers around saving and investing for college. This focus makes sense because we’d all like to be able to cover our education expenses that way in an ideal world and not need to borrow a dime. But in the real world, that’s rarely the case.

Fortunately, parts of the tax code can help lift some of that burden if you know how to use them. As you can imagine, this is an area that we get a lot of questions about during the tax-filing season. So let’s take a look at some of these tax breaks and how you might be able to qualify for them.

The American Opportunity Credit (AOTC)

Since it’s a credit, you can deduct this one right off your taxes up to $2,500 (100% of the first $2k of eligible expenses and 25% of the next $2k) per student (you, your spouse, or a dependent) for up to 4 years of undergraduate tuition and required fees and materials, including books.

However, the credit phases out once your modified AGI reaches $80k for those filing single or $160k for joint filers. On the other hand, 40% of it is refundable for people who don’t earn enough to owe income taxes.

The Lifetime Learning Credit (LLC)

This credit is similar to the American Opportunity Credit, but it’s a little smaller. This credits up to $2k or 20% of the first $10,000 in expenses. That amount begins to phase out when MAGI exceeds $80k or $160k. These amounts will not adjust for inflation for the foreseeable future. It’s also a nonrefundable credit, whereas the AOTC may be refundable.  The credit max of $2,000 is per tax return (per family) and not per student.

However, it’s more flexible since it’s not limited to undergraduate education. Thus, you can use it for graduate or qualified job-related programs or just a few courses you take here and there. Unfortunately, you cannot take Both credits for the same student in the same year.

Tuition and fees deduction

This deduction expired at the end of 2017 and was renewed retroactively in December 2019. So, if you had tuition and fees that were deductible from 2018 to 2020 that you didn’t claim (because they had not extended the law at that time), it’s worth looking into amending your tax return to request a refund.

No double-dipping

It’s important to point out that you can only use one of these tax breaks (assuming you qualify). These tax breaks also don’t apply if you’ve used funds from another tax-free account, like a 529 plan or Coverdell account. They also don’t apply if you’ve used other forms of tax-free educational assistance like Pell grants or Veterans’ programs.

In other words, there’s no double-dipping allowed. (This restriction doesn’t apply to funding sources that are generally tax-free, like loans or inheritances and gifts.) So the trick here is to withdraw money from a 529 or Coverdell account for no more than the amount of qualified expenses that aren’t covered by one of these other tax breaks.

Student loan interest deduction

The tax benefits don’t necessarily stop with the tuition bills. Suppose no one can claim you as a dependent on someone’s tax return. Your MAGI is also less than $85k or $170k joint (with phase-out beginning at $70k or $140k joint). In that case, you can deduct (without having to itemize) up to $2,500 of interest yearly on student loans that you’re legally obligated to pay. That last part means you can’t deduct interest for loans in your children’s names even if you make the payments.

Education is expensive and is rising faster than inflation. The good news is that we can offset some of that cost on our taxes. The bad news is that these breaks can be complex. So, unless you have a good tax preparer, you’ll have to take some time to understand them, which can be an education in itself. So why isn’t there a special tax break for that?

Where Should You Save For College?

January 21, 2021

CNBC ran a series of articles about why college costs are so high. One example they use is Harvard University. In 1971-72 the cost of a year’s tuition and fees was $2,600. If Harvard’s costs were merely tracking inflation, today’s cost would be $15,189. In reality, the cost is over $50,000!!!

That is ridiculously far above inflation in the real world and it’s not just Harvard. The long term trend is that college costs have increased at nearly twice the rate of inflation. That’s astounding! I think that’s why my daughter’s class costing approximately the same as one of my semesters hit me so hard.

That rising cost factor is contributing to an enormous and ever-growing level of student loan debt. It now totals over $1.2 trillion in the U.S. That is a number that continues to grow each year and is a very disturbing trend.

What’s driving these costs? Competing for students by hiring top faculty, building and maintaining facilities and ever-nicer amenities, greatly increasing non-teaching staff positions, and a transfer of financial responsibility from government subsidies to the students and their families are all factors increasing the cost of attending college. For someone facing this burden in the future, the question of “Where should I save for college?” is a very common one. There are a lot of choices out there and I’ll walk through the pros and cons of a few.

UGMA/UTMA (Uniform Gift (or Transfer) to Minors Act):

  • This is a very common way that parents open accounts for young children to collect birthday checks and random other funds that the child receives and where my son’s paychecks from his first job are currently being deposited. The best part of this type of account is that many financial institutions in the country offer these and your investment options are almost unlimited.
  • The downside of the UGMA/UTMA is that at the child’s age of majority (between 18 and 21 depending on the state), the assets become the property of the child so if they see a shiny new car or motorcycle or guitar that they want to buy…they can do that rather than pay tuition. Also, significant assets in the child’s name have the ability to negatively impact a financial aid package.

529 savings plan

  • Typically, when I talk to people and they say they want to open a college funding account, they are talking about a 529 savings plan. (My favorite college planning website www.savingforcollege.com started out as a 529 plan review website and has built other capabilities over the course of time.) 529 plans can offer a state tax break for dollars on the way into the plan, growth that is tax deferred, and if used for education, a nice tax break on the way out. They are a GREAT way for grandparents and other relatives to contribute to the cost of education. When my daughter was very young, I set up a 529 and let all her grandparents, aunts, uncles, etc. know that it existed and suggested that rather than buy a toy that might end up at a yard sale in 18 months, throw a few dollars into the 529. Surprisingly, they listened! She isn’t going to be able to fund college with birthday/Christmas gift money, but it’s paying for books and we are happy that she has that plan in place.
  • The downside of the 529 is that investment options are quite limited, fees may not always be as low as I’d like, and while it’s technically an asset of the parent on the FAFSA form, many schools consider it an asset of the child and can alter the financial aid package accordingly. To combat this, I’ve seen grandparents or a non-custodial parent open the 529 so that it avoids being reported on the FAFSA form. Just be aware that withdrawals from non-parental 529 accounts can be considered income to the child, which has an even greater impact on financial aid eligibility, so you might want to wait until the last couple years of school to tap those savings.

Prepaid 529 plan

  • The prepaid plans are far less common than the traditional 529 above, but where they are available, they can be very attractive options. The way these usually work is that you buy a number of credit hours today at current prices and when the child goes to college, those credit hours are already paid for. The rate of return on the investment equals the rate of tuition increase, which has been staggering over the last 20-30 years. If the child goes to school in another state or at a private university, the funds on deposit cover the average cost of attendance that year at a state public school so there is a nice “bang for the buck” historically since the costs have risen so quickly.
  • The primary downside of prepaid plans is that since they’ve been so good for the investor, many states have frozen or terminated their plans. At a time when many states are struggling to pay the bills (trying not to go on a rant about budgetary restraint here), giving investors a very hefty return on their money puts added strain on a budget.

Taxable account in parent’s name

  • Opening an account in a parent’s name is one of my favorite ways to see education funded. It has a far less harmful effect on financial aid and if the funds aren’t used for education, they are there for retirement or debt reduction or a really awesome vacation! The universe of investments is unlimited and the control of the assets remains with the parent. If there was one place I wish I had spent more time focusing on for my kids’ education, it would be here.

Retirement account

  • Retirement accounts are an area that people are widely using to fund education costs now. From a FAFSA standpoint, these are favored assets since they don’t cause the EFC (expected family contribution) to rise (although withdrawals generally do have an impact since they are counted as income). But the funds are available, either through a loan or a hardship withdrawal from a 401(k) or a penalty-free withdrawal from an IRA, to fund a portion of education expenses. It’s a ready pool of assets that can be tapped when other resources might not be available.
  • The downside of using a retirement account as an education funding vehicle is that every dollar removed is a dollar that isn’t available for retirement. Are you willing to risk having fewer retirement dollars, especially in an era where downsizing, layoffs and an uncertain future (gone are the 40 years and a gold watch at retirement employment situations) are the new normal. This seems like a good short term option for many, but the risks are high. This is a “tread with caution” type of way to fund college costs.

Equity in your home

  • During the housing boom that ended in ‘07/’08, a lot of people used the quickly building equity in their homes to fund college. Today, post-housing bust, that isn’t as common but for those who have been in their homes for a long time and have significant equity, this is still a “go-to” strategy. As someone who is wired to be debt-averse, I’d like to point out that if you pay your mortgage down with additional principal payments and your child gets a full scholarship, I’ve never heard anyone complain about owning their home free and clear. It sure makes retirement easier since cash outflows are easily handled.
  • Much like the downside of using your 401(k), using equity in your home to pay for college could have you paying a mortgage well into retirement, which could mean a reduced standard of living post-retirement or working a few extra years to pay down that debt.

If you are looking for “the best way” to invest for future education expenses, sadly I can’t say that any one of these options is the absolute best in every situation. What can you afford to do today? Do you want to factor in the financial aid impact of your investment strategy or is your income high enough—generally over $100,000—to make financial aid a moot point? Do you want an investment that can be used for your goals should your child get scholarships or opt for a non-college career path? Look at the pros and cons of each option to determine the choice that is most suitable for your family.

How To Invest For Education Expenses

January 21, 2021

Today, I conclude my investing series with how to invest in an education savings account. The first question is whether you even should at all. Before investing for education, make sure you have adequate emergency savings, no high interest debt, and are on track for retirement. This may sound selfish but there’s no financial aid for your retirement. If you’re ready to save and invest for education, here are some things to consider:

How good is your state’s 529 plan?

529 plans are state-based education savings plans in which the earnings can be used tax-free for post-secondary education expenses (but otherwise subject to taxes and possibly a 10% penalty) and you’re not limited to the state in which you live or the state in which your child goes to school.  There are a couple of things to consider in deciding whether to use your state’s plan. The first is whether your state offers a state income tax deduction or lower expenses for residents contributing to the plan. The second is the fees charged by the mutual funds in the plan.

One good resource to consider is financial expert Clark Howard’s guide to 529 plans. The site has an “Honor Roll” of plans to contribute to if you live in one of those states and a “Dean’s List” of the overall best plans if you don’t. It also includes some suggestions on which specific investments in the plan are low cost, including “age-based portfolios” that are like target date retirement funds in that they are fully-diversified and automatically become more conservative as your child approaches college age.

Want more flexibility?

If your state isn’t on the “Honor Roll,” you may also want to consider contributing the first $2k per year (the contribution limit) to a Coverdell Education Savings Account (ESA), which also allows tax-free earnings for education (and otherwise subject to taxes and  a 10% penalty as well). You can also use an ESA for tuition, books, and computers at K-12 schools if needed while 529 plans are eligible to use only up to $10,000/year for tuition at K-12 schools. Here is a list of low-cost Coverdell ESA providers. (Coverdell ESAs have income limits on the contributors but you can easily avoid this by gifting the money to your child and having them contribute it to the account.)

Another option is to open a custodial account in your child’s name. This allows you to invest it in anything and use the money in any way penalty-free for the child’s benefit (not just qualified education expenses). The first $1,100 of earnings each year would be nontaxable and the next $1,100 would be taxed at your child’s rate. Be aware that any earnings over that would be taxed at your rate though. Money in your child’s name can also reduce their financial aid eligibility more than other savings and they can legally use it for any purpose once they reach your state’s age of majority.

How soon is your child going to school?

If your state offers a state income tax deduction and your child is going to school soon, you may want to contribute to a 529 even if your state isn’t on the “Honor Roll.” That’s because the value of the tax deduction can outweigh the higher fund fees in the short term. In fact, in some states you can even contribute to the plan to get the state tax deduction and then immediately use the money for education expenses. In that case, you won’t even be investing the money at all.

If you’re still not sure which option is best for you, you might want to consult with an unbiased financial planner. If your employer offers you access to one-on-one consultations through your financial wellness program, take advantage. If not, consider hiring a fee-only advisor. Whether in time or money, the first education you invest in might be your own.

5 Myths About 529 College Savings Plans

January 01, 2020

As the school year winds down and the invitations to high school graduations start pouring in, I can’t help but think about the day when my own little girl Rachel—who is finishing up her sophomore year—will be sending out her own invitations.  It all seems to be going by so fast but fortunately Susan and I have been preparing for that day by saving in a 529 college savings account.

For some of you moms and dads out there, you too have been using this savings vehicle to help pay for those oncoming college expenses but there are a number of myths floating around out there that could cause confusion when it comes time to using these accounts. Understanding each one will help you and I when it comes time to funding our child’s higher education.

Myth #1: Money in a student’s 529 account will not affect financial aid eligibility

Although 529 assets are included in the calculation for financial aid, the good news is that an account owned by the parent is considered a parental asset so its impact would not be as great as it could have been if it were the child’s asset. That said, some advisors (including yours truly) have suggested allowing non-parents to own the account. While that may prevent the assets from being counted, notice that distributions are treated as untaxed income to the beneficiary. For that reason, we suggest non-parents wait until your child’s junior year to pay for the education with those funds.

Myth #2: A child has legal rights to money in a 529 account

Unlike a custodial account where the child is the rightful owner and has a legal right to control the assets upon reaching the age of majority, a 529 account is the property of the owner, which is typically the parent. Owners have discretion over if and when assets are distributed, may roll over assets from one plan to another, and may change beneficiaries as long as the subsequent beneficiary is related to the original beneficiary.

Myth #3: I am required to use my own state’s 529 plan, and the funds must be used toward a college in my own state

This is a common myth that I often hear in workshops but the simple truth is that you may use a 529 college savings (but not necessarily prepaid) account from any state and your child may attend college in any state and still receive the federal tax benefits. However, some states offer state income tax benefits to residents who use the program from their own state. Even better, residents of states such as Arizona, Kansas, Maine and Pennsylvania are eligible for state income tax benefits regardless of which state’s plan they use. Now how’s that for spreading the love?

Myth #4: If my child doesn’t go to college, or I use the money for something else, I’ll get hit with a penalty tax on everything I’ve saved

Obviously the reason we put money into the 529 account is because we hope to use it to pay for qualified higher education expenses, but if we don’t, only the earnings will be subject to income taxes and a 10% penalty. If possible, rename the beneficiary to someone that will likely use the funds for qualified expenses. You might even name the child of the child that did not go to college (that would be your grandchild, by the way).

Myth #5: I will have to pay a penalty tax if my child is awarded a full ride

If your child is fortunate enough to receive a scholarship, you may be eligible to withdraw up to the scholarship amount without penalty. Just remember that if the scholarship is tax-free the amount withdrawn from the account that is attributed to earnings may be taxed as ordinary income.

For those of you that may be planning to withdraw funds from a 529 account later this year, check out Joseph Hurley’s article on 529 withdrawal traps to avoid. If you’d like to learn more about using a 529 plan to help save for future college expenses, check out this website and this website from the IRS.

10 Steps To Funding A College Education

April 29, 2019

So what does college planning look like in the real world? When my wife and I began planning for our kids’ college, we had to make some educated guesses. Now that we have a couple kids in college, it’s fun to look back at how our plans have shifted as our kids matured.

For example, when my daughter Rachel was 12-years old, I was hoping she would attend the University of North Carolina, so her mother and I at the time planned on paying for her tuition, leaving her to come up with the money for books, fees, and other expenses. At that time, her grandpa had already contributed $6,000 toward her education, so we started saving another $280 a month to meet our goal.

Of course things change, and Rachel chose a small, out-of-state Christian school for her education, which is more expensive than staying in-state, so while we have been able to help with much of her tuition, Rachel has had to take on some student loans to plug the gap in addition to the scholarships she earned.

Our second child David is also in college, and like Rachel, what college looks like for him is different than we originally thought. The biggest surprise is that Rachel’s private education costs about the same as David’s state school because Rachel earned scholarships based on her grades, whereas David did not.

We still have two boys at home, and we’re not sure if they’ll both attend college, but we have saved enough so that we can help each one out a little, knowing that if one sibling does not use all of their college savings, we can always use it for another one.

Since college planning is often a top concern for parents, here’s a checklist to help you plan, whether your kids are 2 or 17.

College Planning Checklist

Step 1: Decide what your college planning will include

Do you want to fund a private or public education? Will your child attend a community college or head straight to a four-year university? Are you planning to pay only for tuition, or will you also plan on covering books, fees, and room and board? Do you hope to cover 100% of the cost, or will you plan on sharing the cost with your student?

Obviously there’s a lot of guessing involved here, especially if your kids are still babies, but go with what you think is reasonable or desirable, knowing that you can always adjust the plan as your kids grow.

Step 2: Explore the current cost of education

The average published tuition for a four-year public school last year was around $10,000 a year ($35,000 for private) according to the College Board. When you add in room and board that number climbs closer to $20,000 ($47,000 for private). If you have a specific school in mind, go to The College Board Web site and look up the current cost associated with your school of interest.

Step 3: Based on steps 1 and 2, determine how much you’ll need to save

Use the Education Savings Estimator to calculate how much you would need to save each month in order to attain your savings goals. Remember, college expenses are inflating at around 3.1% a year, but your school’s inflation rate may be different.

Step 4: Choose a savings vehicle

Most people assume that a 529 college savings account is the best way to go, and for many people, it is. Make sure you consider the pros and cons and are aware of the alternatives as well.

Step 5: Forecast your child’s eligibility for financial aid

Use the College Board’s EFC calculator to estimate how much financial aid may be available for your child when he or she attends college. To learn more about the different forms of financial aid, check this blog post.

Step 6: Complete the FAFSA as soon as possible

In October of your child’s senior year, go to www.fafsa.ed.gov and begin the process of applying for financial aid. Based on information you provide on this application, your child will receive a financial aid package from each school to which they apply. Some school-based aid is first come, first served, so the earlier you complete the form, the better your chances of qualifying for limited aid. 

I also think it’s worth mentioning that everyone should complete the FAFSA, even if you think you won’t qualify due to high income or savings rate. You never know and there’s no harm in applying, even if you don’t accept any of the aid offered.

Step 7: Apply for scholarships

In addition to completing the FAFSA, talk with the guidance counselor at your child’s high school about local and national scholarships he or she may be eligible to receive. Have your student complete scholarship applications based on the counselor’s suggestions.

Step 8: Choose a college

Whether it’s two years at the local JC, or straight off to the four-year university, choose a school that offers your student the best environment for success. Although yours truly made his decision sight unseen, a campus visit is probably a good idea.

Step 9: Consider nontraditional sources of funding to help pay for education

In addition to college savings accounts and financial aid, shortfalls can be covered by home equity loans, retirement savings accounts, cash values in life insurance policies, gifts from friends and family, or current income.

Step 10: Take advantage of tax benefits for education

Whether it’s tax-free distributions from college savings accounts, deducting interest paid on student loans, or claiming an American Opportunity or Lifetime Learning tax credit, you should take advantage of all tax benefits available to help offset the cost of education.  

There you have it. Ten steps to funding a college education. All that’s left is watching your child walk across the stage to accept their diploma, just don’t forget the camera and tissues. 🙂

How To Evaluate Your Financial Aid Award Letter For The Best Choice

April 12, 2019

College financial aid award letters are rolling in, and along with it, the confusion of helping students decide what to do next. Financial aid packages can be tricky to decipher. There is no standard for the financial aid award letters and the terminology can be confusing.

There are award letter comparison tools like this one from Finaid.org as well as sample financial aid award letters that can help, but here’s what you want to pay attention to as you compare and ultimately decide which to accept:

Calculate your own total college costs

Your letter will list the total costs of college, but you will need to put on your detective hat to find out the true cost. Going with the costs listed on the award letter could lead to under or over-borrowing.

Verify the cost of tuition, books, fees (enrollment, lab fees, etc) and room and board (including the different meal plans) through each school’s website that you’re considering. Don’t forget the fact that the student may need money for personal care, fraternities/sororities, sports teams, etc. Finally, to get the full cost, contact the department the student’s major to learn any additional costs for things like specialized computer software they’ll have to purchase, graphic calculators, etc.

Don’t forget transportation

Factor in transportation since this can add up to thousands of dollars a year depending on the distance between school and your home as well as the method of transportation. These are all things to consider as the true cost of college, and knowing them ahead of time will not only help you evaluate the true value of the award package, but it can help you anticipate unplanned costs like a lot of airplane rides for a homesick child or an empty nester parent.

Know the difference between net price and net costs

While award letters focus on the net costs, you’ll want to focus on the net price in making the decision. The net price is the difference between the total college costs and the total non-loan aid (scholarships and grants). In other words, it is the amount that your family is on the hook to pay either through savings or loans. The net cost is the difference between the total college costs and the entire financial aid package (including loans and work study).

The net costs are typically closer to the expected family contribution (EFC). Sometimes you may see a net cost of $0. This does not mean the cost of college is free, it just means that you may not need to dig into savings to pay tuition – but you will probably have to borrow.

Some award letters will throw in a ton of loans, including a PLUS loan, to get the net cost to zero. A financial aid award package with a $6,000 net price may be a better deal than a package with a $0 net cost if most of that $0 net cost package is made up of student loans vs. grants.

Learn how to evaluate the actual award

Compare how much free money each college is actually offering. As you read the award, carefully track the offers of free money, free money with strings attached, forgivable loans disguised as free money (grants) and actual loans. Some colleges will front-load grants and scholarships in the freshman year to entice enrollment, but then those go away, meaning you may not get as much aid in future years.

Are awards renewable? Find out if the awards are renewable each year until graduation (or at least for 4 years) and what strings are attached, if any. Some of the strings may be maintaining a certain GPA or a certain course load.

Work study considerations: If the plan includes work study, ask if the programs have a post-graduation employment requirement. Not fulfilling the employment requirement can turn your free grant into a loan.

Basically, you don’t want a bait and switch financial aid award package that sounds great enough to get you hooked into accepting the college until you read the fine print and find out you may not be able to afford the second year.

Get ready to negotiate

Many people are surprised to learn that a financial aid award package is not written in stone. If your desired school offers an anemic financial aid awards package, consider appealing the award – competition is fierce for students, especially at smaller schools, who would rather have enrollment numbers than tuition.

Tips for appealing your financial aid

Put it in writing. If you are appealing based on need, contact the financial aid office to understand the appeals process, get the correct points of contact for an appeal and state your case in writing. Be specific and state if you had a drop in income, a medical crisis, more than one child attending college, or are suddenly single.

Get creative. You might ask for an unsubsidized loan to be upgraded to a subsidized loan or even for a clothing allowance for kids moving to very different climates (think LA to Boston).

Followup with an appointment. Give it a week and then call your point of contact or make an appointment. If your making a case based on merit, consider directing your letter to the enrollment or admissions office and start bragging.

Create competition. Use the better award letters to ask for more money and show off your child’s stellar academic record, especially if their grades or aptitude test scores improved since their college application was submitted.

The choice of college is an important one, particularly when financial aid needs vary widely between choices. Don’t make a hasty choice that you may later regret. Even in the 11th hour, these steps can help you evaluate your financial aid award packages to help you make the most informed decision for your family.

4 Red Flags To Watch Out For With Student Loan Pay-off Offers

March 22, 2019

If you’re dealing with student loan debt, I’m sure you already know that the total amount owed these days is over $1.5 trillion. Wouldn’t it be nice to be able to hit the reset button and just not have to pay that debt back? Or to at least get some type of relief, either in the form of a lower interest rate, or legitimately having the debt forgiven?

There are actually programs out there to help with that, but before you start taking advantage, it’s important to understand that there are some scams out there too. How do you know?

Here are the red flags to watch out for

Red flag #1: A promise to just wipe away all your debt

It’s hard to get in a relationship with someone who makes promises they can’t keep. If a company is promising they can wipe out your debt or slash it in half, a red flag should go up.

It’s true that there are ways that your federal student loans can be forgiven if you meet the requirements. Those include being employed by a government or not-for-profit organization, and making at least 10 years’ worth of payments. If that’s you, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness Program or if you’re a teacher you might be eligible for the Teacher Loan Forgiveness program.

However, taking advantage of these opportunities is totally on you, so beware of any company telling you they can make it happen without the above circumstances.

If you have private loans, the fact is that they don’t have a loan forgiveness option. Consider reaching out to your private lender directly to inquire about this as rules can change, but walk away from anyone promising to alleviate you of all your private debt without you actually having to pay it off.

Red flag #2: Charging a fee to help you

There are federal programs available to help with federal student loan debt and enrolling in one of those programs costs you exactly $0.00. Not a typo. It’s free. 

A scam artist will entice you by letting you know these programs are available to you and that they can help enroll you into one. All you have to do is pay them a fee. Don’t fall for it!

Also, watch out for companies that want to charge you a fee to help you refinance or consolidate any of your loans. You typically can do that without an upfront fee as well.

Why pay someone for something that you can do on your own at no cost besides your time? It’s true that time is money and money is time, but in this case it doesn’t sound like a good deal. Check out your federal loan servicer for more information – they are there to help for free.

The bigger lesson here is that whenever you’re presented with programs that require upfront or advanced fees before they help you, it’s a sign that you may be about to fall for a scam.

Red flag #3: Pressure to act immediately

In most areas of life when someone is trying to rush you into making a decision, it’s a good time to pump the brakes a bit and do your due diligence. Check out the company or program you’re considering. How much information is out there about them? Are there reviews available for you to learn more about them?

Visit their website, but don’t enter any personal information on their site before you’re comfortable that it’s safe. Ask people you trust which companies they’ve used to refinance or consolidate their loans. Take the time you need to make sure you’re signing up for a good deal. If anyone is trying to get you to act right away before a “deal” goes away, let it – it’s probably not a good deal anyway.

Red flag #4: Requesting your social security or account number

Another red flag is when a company contacts you first, then asks for personal information like your Federal Student Aid ID or your Social Security number. Obviously if you’re making a call to a loan servicer or to refinance or consolidate, you’ll eventually have to provide that information, but anyone contacting you and leading with that request should be a red flag.

A legit company will likely not ask you for this type of personal or sensitive information until you’ve decided to move forward with engaging their services.

What to do if you suspect a scam

The reality is that scam artists exist. If you come across a student loan scam, please take the time to report it by filing a complaint with the FTC, and the CFPB.

The bottom line is that the best way to pay off your student debt, whether you have federal, private or both, is to know your options and put together a plan of attack on your own. Sometimes that may mean not prioritizing paying back your student loans over other financial goals, other times it may mean that you do. Either way, take caution not to get scammed in the process.

What Do You Need To Know About Pre-Paid College Plans?

February 21, 2019

When it comes to saving for college for your kids, perhaps you’ve looked in to pre-paid plans offered by your state. Let’s review that decision from all sides.

What exactly is it?

A state pre-paid college savings plan is basically a plan that is sponsored by the state that allows you to open an account and save towards future college expenses now before your kid goes to college, BUT you typically get to lock in the cost of tuition at today’s rates.

The typical perks

1) Lock in today’s rates – The idea is that you essentially may not need to worry about how much college costs go up in the future because you lock in today’s tuition (and certain fees) in your state at participating colleges and universities.

2) Not directly responsible for investment performance– Another benefit is that you usually don’t have to worry about investing your contributions on your own over the years OR choosing a company to manage those funds on your behalf – the state assumes that risk and responsibility.

While the stock market will definitely have its ups and downs, you likely won’t have to worry about adjusting your investments because that’s all done within the prepaid plan.

3) Still covered at other schools – Typically, you can still use the money if your child goes to a school not covered under your state’s prepaid plan, including schools outside of your state’s plan, although you’ll likely have to pay more.

4) Still considered a parental asset – These plans are considered to be owned by a parent and are reported on the FAFSA, but it counts much less when determining how much a family is expected to contribute towards a child’s college costs than if the account was considered the student’s asset. 

What’s the catch?

I know, it sounds almost too good to be true. Here’s what you need to know: not all state prepaid plans work the same. Be sure to know what you’re getting into even though the perks sound promising.

QUESTIONS TO ASK so that you know what you’re getting into and can make a sound decision:

1) How is your money protected? Some plans have a guarantee and others don’t. Some plans have failed in the past and people have lost money that they’ve contributed.

 2) How long has the plan been around? Has it ever defaulted or had any negative news in the past? A plan that has been around for many years, without issues paying out as students transition to college is more reputable than a plan that hasn’t been around as long or that is not popular in the state and isn’t really being used/invested in. (Example: Illinois)

3) What schools accept your state’s pre-paid plan?A quality education is important, so you’ll want to make sure that an education from the schools on the list will be worthwhile.

4) What if your child chooses a school not on the list? With most plans, you’ll be able to receive the value of what it costs to go to a school in the state you purchased the plan and then put those funds towards the tuition for a school not on the list or even one in another state.

You could be on the hook for additional tuition costs if what the pre-paid plan provides is not enough to cover the out of state school.

5) Are there any penalties if you request a refund? Find out the refund policy and any associated fees. For instance, some plans only refund the exact amount you put into the plan and may even subtract a fee from that. Other plans may allow a percentage of any investment gains to be included in the refund.

6) Are there any restrictions with how soon you can request a refund? Some plans require you to wait two years, or you’ll be charged a penalty reducing how much you’ll receive as a refund.

7) How much does it currently cost to cover tuition and applicable fees in your state? Visit several school websites in your state that have quality education options and find out their costs. You can call the school as well. Compare that to how much it would actually cost you per credit hour based on the monthly cost of the plan. Make sure that you won’t be paying significantly more over time than the promised locked in cost of today’s tuition rates in your state.

8) Exactly what expenses does the prepaid plan cover? Some only cover tuition and certain fees. Find out what those fees are. Contact several of the colleges and universities in your state and find out what fees they charge that the prepaid plan will not cover.

9) What is your plan to save towards expenses not covered by the pre-paid plan? Dormitory expenses are not likely to be automatically included, but some state prepaid plans offer a separate dormitory option that you can add on for an additional cost.

Some people opt for a combination of a state’s prepaid plan to lock in tuition costs, along with other savings options like a traditional 529 savings plan to fund expenses, like books, that may not be included under the state pre-paid plan.

Prepaid plans aren’t for everyone.

For families that are pretty locked in on what school their kids will attend, these can be a great hedge against future costs of education. The trade-off is that you may limit your options and are locking your kids into going to college in order to receive the most value for your money. Whichever side you find yourself on, it’s important to understand the ins and outs of whatever you choose.

What To Do With Left-over 529 Account Money

January 07, 2019

Some financial problems can be good ones to have. This is one of those examples. What happens when you, your child or any beneficiary of a 529 account gets out of college without using all the money in their 529? Don’t laugh – like I said this is a problem, but it’s a good problem to have, and some people actually have this happen.

Here’s a quick review of five different options, depending on your situation:

1. The scholarship exception. If you still have money because the beneficiary qualified for a tax-free scholarship, you can take a withdraw from your 529 plan up to the amount of the scholarship and not pay the 10% penalty, but you will be taxed on any earnings. (remember that you can also use 529 funds tax-free for room and board, books and other fees as well)

2. Hold it for later. Check and see if your 529 Plan requires distributions by a certain age (some do not). The beneficiary can use the money for graduate school or additional education expenses in the distant future if not.

3. Help out another family member. 529 funds can be transferred to another family member without tax implications and used for their higher education expenses, so decide which is your favorite niece or nephew now. A beneficiary’s family member is defined as:

  • Spouse
  • Brother, sister, stepbrother or stepsister
  • Father, Mother or an ancestor (Grandparents)
  • Stepfather or stepmother
  • Son, daughter, brother or sister of the taxpayer/account owner
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
  • Any first cousin of the beneficiary

4. Roll to a better plan. If there is a distribution requirement by a certain age, you could also consider rolling the money over to another plan that does not require a distribution by a certain age. Be aware that you are only allowed to do one rollover in a 12-month period, so choose carefully. And keep in mind that a rollover may have state income tax consequences, especially if you received a state income tax deduction when you made the contribution.

5. Take the cash, pay the penalty. If all else fails and you have no way to use the money for qualified expenses in a way that would help you or someone you care about, there’s always the option to just take the cash. You will have to pay taxes on the gains plus a 10% penalty, so talk with your tax advisor before doing this so you can plan accordingly.

But before you do that, a quick anecdote from my colleague Kelley – her college classmate Holly (not her real name) was awarded a full ride scholarship to college, so her parents withdrew the 529 money to buy her a new car as a reward. Not only did Holly crash and total the car before the summer was out, she ended up losing the scholarship after 3 semesters due to academic performance. Best to wait until everyone in your family is 100% certain they are in the careers they love with no additional out-of-pocket education costs to come before you exercise this option.

I hope that all of your financial problems are good problems like this.

 

 

Is Your ‘Dream School’ Actually A Nightmare Waiting To Happen?

December 10, 2018

Last week two things happened that really drove home the true cost of over-borrowing for college or career training. First, I read a study that said parents spend twice as much on their ADULT children as they save for retirement. That statistic shocked me. Then I did a webcast sponsored by one of our clients for some local high schools. That helped everything make a bit more sense.

How parents end up financially helping their adult kids

In going through the webcast, we talked about goals for the next 5 years, a pretty reasonable time frame for 17 year-olds. Not surprisingly, the top two goals they had were completing college/career training and buying a car. Those are both very normal and reasonable for folks their age, so no problems so far.

Rule of thumb for college borrowing: no more than first year’s earnings

Then we got into what it would take for them to accomplish those things in a financially viable way. When discussing how much student loan debt is “too much,” we reviewed the rule of thumb that you don’t want to borrow more for your education than you expect to earn in your first year. In other words, if the average starting salary for college graduates is roughly $50,000, that means that the max in student loan debt you should accrue is $50,000. Graduating with that much debt would lead to a monthly payment of about $600.

Factoring in a car payment as well

To drive the point home, we looked at what you could pay for a car on a $50,000 salary. Factoring in that banks don’t like your debt payments to be over 36% of your pay (after paying rent in an average city), that means that with the $600/month student loan payments, the MOST you could borrow for a car would be about $13,500.

First of all, that was an eye opener for the students who felt like $50,000 a year would surely afford a much sweeter ride than a used Chevy Cruze. What registered with me though, is why so many parents are over spending to help their kids – they almost have to! Even with a less expensive car, there really isn’t a heck of a lot left over for other stuff like saving for a house, standing up in weddings, entertainment and all the other things we like to do in our 20’s. It’s manageable for sure, but it means those kids are making sacrifices somewhere else.

The problem – too much student debt

More importantly, this is an example of someone who followed the “rules.” What about those families that borrowed more than the first year of income? Obviously if you have a recent graduate who is struggling to pay their student loans, then a parent who probably feels guilty about not helping more with education costs in the first place is often going to overcompensate by helping pay for other costs like cell phone bills, medical or car insurance or maybe even the student loan payments.

What can we do about it?

It might be too late for those families where the kids are already on the struggle bus in their 20’s, but it’s not too late for my peers who are just getting ready to launch our kids. The earlier we prepare, the more options we have.

Obviously, if you start saving in a 529 college savings plan while your kids are still in diapers then you can help pay for more education expenses and reduce the amount they need to borrow. But time – and cash flow – may not be on your side. There are a few ways to address this (like this one from my colleague Teresa), but one way is to re-think where your kid goes to school. Regardless of how old your kids are, you can help them weigh the pros and cons of their “dream school.”

When it makes sense to stretch for your “dream school”

There are times where paying more for college may be worth it. Maybe there are no in-state schools that offer your child’s major (my daughter’s friend who wants to be a marine biologist just isn’t going to have many options here in Kansas). We have some close friends whose daughter wants to be an animator for Disney or Dreamworks. She has that kind of talent, but there are only a couple of schools that those companies recruit animators from, so she’s going there.

When it doesn’t matter what your diploma says

That said, the vast majority of students have majors that are common. My oldest daughter is a freshman in college and she is an elementary education major. As a teacher, your salary is defined by years of service and education level – they don’t care where your degree came from. So for her, it made sense to attend a state university to keep the costs down. The return on investment just wasn’t there for the private schools that sent her information and wanted her to attend their school.

How my youngest daughter is deciding where to go

My youngest daughter wants to be a business major. She also knows that she wants to eventually get an MBA and live in a major city – at least the size of Kansas City (where she has grown up) and probably much larger. Originally, she wanted to go to a private school in New York or the Bay Area. But after realizing that her college fund will only cover an in-state cost, she has rethought the ROI of taking on a ton of debt (I’m doing my job as a Dad there!).

She has visited three out-of-state schools so far, has a visit set for her in-state option and is looking at two more out-of-state schools and one private. She eliminated most of her private school options and is focused on schools that offer in-state tuition for a certain ACT score or offer enough scholarships to make it comparable. Two schools she is looking at are closer to Texas since companies in the Dallas area recruit there heavily.

The main reason to consider them is she could pay in-state tuition and likely end up in the Dallas/Ft Worth metroplex, which just happens to be home to several top MBA programs. If she picks the right company, she can likely even get her future employer to help pay for that MBA!

Focus on “dream life” versus just dream school for the best ROI

The bottom line is that it doesn’t matter what your kid is doing after school if they feel strangled by the debt they had to take on to get there. And you won’t be doing anyone any favors if you have to compromise your own retirement to help them survive those early years of their career. The best way to help will be to keep them from taking on the burden in the first place.

So help your kid focus on their dream AFTER school instead of their “dream school.” This can help them plan and understand the downside of excess debt. Your kids – and your wallet – will thank you later!

Waited Too Long To Start Saving For College? Here’s An Alternate Idea

December 04, 2018

I often speak to parents who feel guilty because they don’t feel they’ve done an adequate job of saving for their child’s education. Like a lot of folks we work with, they graduated with their own student loans, maybe got married, took out a mortgage, had children, paid daycare expenses, had unexpected setbacks, helped their aging parents, and so on, and so on. Saving for education never rose to the top of the priority list.

Time to get serious is often too late

Now that their child is in high school, they know they need to get serious about saving for college expenses, and they’re disappointed when they learn there is no magic investment out there which guarantees a 20% rate-of-return with zero risk to catch up and close the savings gap. One recent caller I spoke to would need to save $1,200 per month to meet the goal. She was so worried about the heavy burden of student loan debt on her child’s shoulders that she was willing to cannibalize her own retirement account to make it happen.

Rather than feeling guilty and jeopardizing your own future, I ask that you consider a mind shift….

An impactful alternative to paying for college

If you can’t offset the tuition and costs of their education today without a major change to your current situation, why not help them get a jump start on their retirement instead, and have your child take out loans for college? Bear with me here: what if instead you could contribute $1M or more to their retirement nest egg at a much lower annual cost than college?

It’s totally possible. Consider the following hypothetical…

If your 16-year-old teenager works just 15 hours per week at the federal minimum wage, he/she will earn about $5,655 in gross wages in a year. Now what if you and your teenager agree to invest $5,500 in a Roth IRA in their name, the maximum allowed for 2018? Then, make the commitment to invest a total of $5,500 each year (about $459 per month) until your child graduates college as incentive (assuming he/she continues to work and earn at least $5,500 per year).

Assuming graduation at age 22, the total deposits to your child’s Roth IRA after 7 years would be $38,500. Assuming a 7% average return, it would be worth about $47,500 by the time they graduate college. (That might be the equivalent of 2-3 years of college education!)

Now let’s assume no additional deposits or withdrawals. Assuming a 7% average return over the years, the Roth IRA could grow to about $1,026,000 by age 67. Even better, the withdrawals would be tax-free since the funds are in a Roth IRA.

That’s the power of time and compounding. 

Now assume your child waits until age 32 (maybe after all of their student loans are paid off) to start getting serious about their own retirement savings. They start saving $5,500 per year every year until retirement at 67. That makes total deposits of $198,000 for 36 years and, at 7%, it would only grow to about $876,356.

That’s the impact of procrastination.

Starting earlier means saving less and having more

While I’m not suggesting that your child’s retirement should take precedence over education funding, these examples give insight into an alternative way to help your child build a solid financial foundation early on by leveraging the power of time and compounding.

Another benefit to this strategy is that a Roth IRA is not counted as a spendable asset on the FAFSA.

Other ideas if you can’t afford to max out a Roth IRA

If you can’t invest the maximum contribution to a Roth IRA, consider a lesser amount to get them started. Another option is to introduce them to the concept of a “match” by matching any contribution they make with your own contribution dollar-for-dollar. You could even encourage relatives to gift dollars for Roth IRA deposits as well, as long as you don’t exceed the current limit of $5,500 and as long as your child has earned income to match the deposits.

The point is to get them on the track towards a secure financial future without derailing yours in the process.

 

 

Should You Transfer Your 529 Account If You Move To Another State?

October 29, 2018

We moved to Texas when my daughter was 4 years old after living in four houses in two different states since she’d been born. (Believe it or not, I’m not in the military.) At that point my spouse “informed” me that we would not be moving again for a while. I agreed to stay where we were for three years. That was 20 years ago, and we are still in the same house. #happywifehappylife

At the time we moved to Texas, we had already established a 529 college savings plan for my daughter in North Carolina, where we lived at the time I opened the account. The question became whether I should transfer that account to a Texas 529 or leave it where it is (or transfer to another state’s plan). The answer isn’t black and white and depends on which state you now live in. Here’s what to consider.

Where you live matters

Each state has their own 529 plan, and some have more than one. However, you don’t have to use your state’s 529 plan, but there may be state tax benefits if you do, depending on which state you live in.

For example, Ohio offers a state income tax deduction for residents who contribute to Ohio-based 529 accounts, while Pennsylvania residents are eligible for a deduction for contributions to ANY state’s plan. California residents are out of luck – no deduction for any state’s plan, including California-based, while Texas residents like me don’t really care about which plans offer a state income tax deduction because we don’t have a state income tax.

Remember that you can use 529 funds in any state, so which state’s plan you choose depends largely on the tax deduction for deposits, followed by the investment options and fee structure of the plan you choose. (more on some of the other basics of 529’s here)

Should your 529 move with you if you switch states?

If you have a 529 plan in a state that you no longer live in, you may want to move your 529. The IRS allows one tax-free rollover from one 529 account to another per 12-month period. These rollovers do not qualify for a state tax deduction, but your future contributions might. Reasons for doing a rollover include:

  • To obtain state income tax deductions in your new state
  • To use a better plan if you no longer qualify for a deduction
  • Simplicity – you don’t want multiple 529 plans in different states (although you are allowed to)

What we did

Like I said, we started a 529 for my daughter in North Carolina, but after we were in Texas for awhile and it became clear that we were going to be there for more than three years, I transferred it to a Texas 529 because I liked the investment options better. Ironically, my daughter ended up going to college in … North Carolina.

Because Texas does not have a state income tax, this did not affect me financially – I had no deduction for deposits to NC or TX plans once we moved to Texas. Her being 1,201 miles away from me, on the other hand, affected me a lot (both financially and emotionally).

The bottom line

If you move to a new state and aren’t sure what to do with a 529 account from your former state, here’s what to consider:

  • Opportunity to obtain a state income tax deduction in your new state (reason to transfer unless you move to one of the state’s that allows a deduction for any state’s plan)
  • Investment options (if you’re not eligible for a tax deduction in your new state, then choosing a plan with low-cost, high quality investment options would be the top criteria. More on that here)
  • You can only transfer from one plan to another once every 12 months (reason not to transfer if you’re planning to move again within 12 months)

What doesn’t matter? Where your child plans to go to school – 529 funds can be used in any state.

 

How To Make The Most Of FAFSA For Maximum College Funding Help

October 01, 2018

If you are the parent of a college-age student or will be someday, you have a new best friend with an unusual name, and her name is FAFSA. FAFSA and I go way back.

My relationship with FAFSA

I first met her decades ago when I was preparing to launch my own college career, and she has recently come back into my life. I have one daughter heading off to college this fall and another daughter a scant two years behind her. As a result, FAFSA and I are once again spending lots of quality time together. She likes to ask a lot of pesky, intrusive financial questions, but if you are patient, thorough, and have the correct answers, FAFSA can be a very generous friend.

Getting to know FAFSA better

Who is this FAFSA, you ask? The Free Application for Federal Student Aid (FAFSA) is a standard application for financial aid filed by students (and parents thereof) attending undergraduate college programs, career schools, or graduate school.

Not just for need-based financial aid

Lest you think that your income is much too high for FAFSA to take any interest in your plight, I’ll encourage you to reconsider. While FAFSA is used to apply and qualify for practically all forms of needs-based financial aid, such as grants and loans, it is also widely used for many scholarship programs. FAFSA is not for student loans alone – many universities and state programs utilize FAFSA data to award aid from their own scholarship and grant programs.

I’ve gotten to know FAFSA intimately over the years, and if you say (and properly verify) all the right things, she just might connect you with some college cash.

Time is a cruel mistress

One of the first things to remember about a successful relationship with FAFSA is to always be on time. Always. The window for completing the FAFSA each year is between October 1 and June 30. For example, my daughter started her freshman year in college in August, 2018. That means we started working on her FAFSA during the fall of her senior year in order to complete the paperwork as close as possible to the October 1, 2017, FAFSA availability date for the 2018-2019 academic year.

We could have waited as late as June 30, 2018, (the end of the academic year) to complete this task, but that could be a costly mistake. According to Savingforcollege.com, students who file the FAFSA early (within the first three months) on average receive twice the amount of grant money as do students who file later. The lesson here is don’t leave FAFSA waiting; she just might give away your grant or scholarship money to an earlier applicant. Oh, and you’ll need to repeat this process every October until your student graduates.

More ways to cozy up with FAFSA

Other than filing early and often, are there any other ways to woo FAFSA and possibly score additional funding for college? Oh yes. Here are a few additional college aid strategies for you to explore:

  • Gifts from grandparents. Make these gifts to the student’s parent(s), not to the student directly. Gifts from grandma and grandpa are counted as “untaxed income” if made directly to the student. However, giving the money to Mom or Dad is ignored by FAFSA. Alternatively, grandparents can make a 529 plan contribution to a plan owned by either the student or a parent (but not owned by grandparents!).
  • Minimize your net worth. Do not include the value of money in parents’ retirement plans, qualified annuities, or the value of the family home when computing your family’s net worth on the FAFSA. This is a common mistake, and it can make you appear unnecessarily wealthy for financial aid purposes.
  • Marital status matters. If parents are divorced or separated and do not live together, can the student live most of the year with the lower-income or least wealthy parent? If so, only this parent should provide financial information for FAFSA.
  • Viva la Independence! Can or does the student live on his/her own and is no longer claimed as a dependent on parents’ federal income tax?  This one is tricky, as these conditions alone may NOT be sufficient to claim independent status in the eyes of FAFSA and avoid reporting parental financial information. Generally, single students with no dependents who are under the age of 24 must still include parental assets and income on the FAFSA, even if they are totally self-sufficient and live separately from Mom and Dad. There are exceptions, however. The Federal Student Aid Office of the U.S. Department of Education provides an extensive list of criteria necessary to claim independence for FAFSA purposes, including marriage, having children or dependents of one’s own, military service (active duty or veteran), and several other extenuating circumstances.

FAFSA is your friend

Sure, it can feel like a hassle to sift through all of your financial data and go through the FAFSA process every October in anticipation of the coming academic year. However, individual circumstances can and do change, so you want to keep FAFSA up to speed with what’s going on in your financial life each and every year. Otherwise, FAFSA only knows what you told her last year, and you both might be overlooking some valuable college financing options if you don’t keep her fully informed.

Besides, taking a thorough inventory of your financial situation once a year is always a good practice, even if you aren’t applying for college financial aid.

 

Using A Roth IRA To Save For Education Expenses

August 06, 2018

When it comes to saving for college costs, you probably think of 529 savings plans and Coverdell Education Savings Accounts (ESAs). After all, the earnings in these accounts can grow to be tax-free if used for qualified education expenses and you may receive a deduction on your state income taxes, if you qualify. However, they come with a significant downside. If you need the money for another purpose, you’ll have to pay taxes plus possibly a 10% penalty on any earnings you withdraw.

A quick review of Roth IRA rules

One solution is to use a Roth IRA for education savings. Since the contributions to a Roth IRA can be withdrawn tax and penalty-free at any time and for any purpose, including education expenses, it can be a great tool to save for some of those “what-if” goals. If you withdraw earnings before you’ve had the account at least 5 years or before you turn age 59 ½, you may have to pay taxes plus a 10% penalty on them (one exception is for qualified education expenses), but the contributions always come out first.

Other things to consider when deciding between Roth IRA & other education savings options

Flexibility

Using a Roth IRA to save for education gives you a lot of flexibility. If you need the money in an emergency, you can withdraw the sum of your contributions without tax or penalty. For qualified education expenses, you can use the remainder of the contributions tax and penalty-free plus earnings penalty-free (remember that you’ll pay taxes on any earnings withdrawn for education expenses if you’re not yet 59 ½). Anything you don’t withdraw can grow to be tax and penalty-free after 5 years and age 59 ½ and help to fund your retirement.

Financial aid eligibility

Unlike 529 plans and Coverdell ESAs, Roth IRAs are also not counted as assets in determining financial aid. However, withdrawals are counted as income, which could hurt future financial aid eligibility more than assets. The solution is to wait as long as possible to withdraw money from your Roth IRA so that as much of the financial aid as possible will already be awarded. It also makes sense to deplete 529 and Coverdell ESAs first.

Investment options

One downside of using a Roth IRA for education expenses is that you won’t have access to the age-based investment options that many 529 saving plans have. These funds simplify investing much like target date retirement funds in that they are fully diversified and automatically become more conservative as your child gets closer to college age.

You could invest in target date funds using the date when your child goes to college, but these funds will likely be too aggressive since the money can be withdrawn over a much longer time frame for retirement than for education. Instead, you’ll have to make the portfolio gradually more conservative yourself or work with a qualified and unbiased financial planner who can help you with that.

In any case, consider opening your Roth IRA at a discount brokerage firm like Vanguard, Charles Schwab, Fidelity, TD Ameritrade, or E-Trade that has a wide selection of low cost investment options.

This strategy is not for everyone

If you have sufficient emergency funds and know you will use the money for education expenses, a 529 plan or Coverdell ESA would probably make more sense since the earnings could be completely tax-free. Some states also give you a state tax deduction for 529 plan contributions (which is another tax-savings strategy discussed in this post). The important thing is to be aware of the pros and cons of your options so you can make the right choice for you.

Should You Take Out Student Loans For Graduate School?

August 02, 2018

Are you considering graduate school? If you’re like most American graduate students, you’re probably going to borrow at least a portion of your tuition and other costs. The student loan debt from graduate school piled on top of undergraduate loans can be intimidating. According to research from the New America Foundation, the median debt for graduate students is $57,600, with one in four borrowers owing about $100,000 or more.

What are the consequences of borrowing that much?

“I won’t know what it’s like to earn a full paycheck until my 50s and that’s discouraging, because by then I’m sure I’ll have other debt to pay off (mortgage, etc),” said a younger co-worker who is frustrated by her graduate and undergraduate debt. I struggled to pay off my own undergraduate student loan debt (the equivalent of about $35,000 in today’s dollars), so I hesitated on borrowing for graduate school.

Both my sisters have graduate degrees, so I’m the odd duck. I waited until I could pay my fees myself and chose to pursue professional designations instead of a university program. My former employer reimbursed me for obtaining my CFP® and ChFC® designations, and I paid for my CFA® courses myself.

My youngest sister, Caitlin Bauer, who has worked in multiple higher education institutions — and who is paying off her own graduate student loans – likes the idea of working for a company with a tuition benefit. “On a personal level, I’ve often advised acquaintances with whom I’ve spoken about grad school to maybe not go directly from undergrad unless absolutely necessary, but to try to find a job with an employer who will offer tuition benefits or even with a university where they could take at least part of their program for free or reduced cost,” Caitlin observed. She reminded me that, “going to school full-time while working a full-time job is often not possible or practical, but it can be a more financially-savvy option.”

How graduate school loans affects life milestones

Caitlin still has six figures of student loan debt, and most of it is from graduate school. “Unfortunately, the interest rates for direct loans were sky-high when I attended.” She can’t refinance them for a lower rate because she is on an income-based repayment plan and pursuing public service loan forgiveness as she works in the public sector, so she needs to keep her debt in the federal program. “I feel very much held hostage by my loan debt. Buying my own home is out of the question at this point in time, and I’m unable to contribute as much to my retirement savings as I would otherwise.”

But there’s generally a salary boost

Graduate school, if done right, can help you substantially increase your income over time. According to this article in the Financial Times, the financial rewards of an MBA are rising but so are the tuition fees. In 2018, over two-thirds of MBA cohorts doubled their salaries within three years after completing their degree, the article reported.

Across all disciplines, Bureau of Labor Statistics data show that Americans with a master’s degree earn 19% more than those with a bachelor’s degree only, and those with professional degrees earn 57% more.

Figure out your ROI

A useful guideline is to limit total student loan debt to no more than the average salary for your field for someone with a similar degree. If the average salary of a lawyer in your state is $120,000 per year, then that’s the absolute max you should borrow, inclusive of your undergraduate school loans. That means if you’re thinking about getting a masters in social work, where the program costs $70,000 and the average social worker’s salary is $46,000 and you have $30,000 in undergraduate loans, your return on investment is going to be negative if you borrow the entire cost of school.

Not sure how to begin? Use this graduate school ROI calculator.

Think of graduate school like home ownership

I propose that you think of it like buying a house. It’s such an expensive investment, few people can afford to pay for it in cash. Using the law school example, at today’s mortgage rates, that monthly payment of $1,187 is like paying a mortgage of around $227,000. No wonder it’s an investment most people must finance.

You’d also never pay more for a house than comparable neighborhood prices suggested it was worth. “There are a lot of factors to consider when even choosing where to go for graduate school, so it’s important to do the homework and find a program that’s a good match in terms of what you want to get out of it,” cautioned Caitlin. “Otherwise, what are you paying for? Make sure your program is reputable, because you are making an investment.”

Avoid private student loans if possible

I frequently talk to employees on our Financial Helpline who are struggling with student loans, often because they took higher interest private student loans only to later find out that they can’t get a break from paying them during a period of unemployment. “There can be very little wiggle room or willingness to negotiate smaller payments for private loans,” explained Caitlin. If you can, avoid private loans. Generally, private loans are more expense and a lot less flexible than a federal subsidized or unsubsidized student loan and are not eligible for income-based repayment, forbearance, deferral or loan forgiveness.

If you have private loans which you are already repaying and have a good credit score, you may want to look into loan refinancing with one of the new crop of student loan refinancing sites such as SoFi, Earnest or Common Bond. Do your homework and compare terms and risks before you choose. It’s generally not a good idea to include your federal student loans though, as the flexibility of repayment plans can be useful in the event of a financial upheaval, such as a layoff or illness.

Borrow only what you need

Students can get themselves in hot water later by borrowing what’s offered, instead of only taking what’s needed. The goal is to graduate with the absolute minimum in student loan debt. While it’s tempting to borrow for all living expenses, remember that you’re borrowing against your post-graduate quality of life.

“When you do borrow, never borrow beyond what you absolutely need,” warned Caitlin. “Budget carefully! I wish I’d done this better.”

Pay interest early

“Try and pay even a little on the interest if possible while in school (it’s not always possible – wasn’t for me) because it’ll a) help keep it down and b) it’s a tax deduction!” said Caitlin. Most student loans don’t require repayment until you’ve been out of school for six months. If you are working full or part time while you’re studying, pay as much as you can afford on your highest interest rate unsubsidized loan. Remember, unsubsidized loans accrue interest while you’re studying. For a success story on how one MBA student did this, see this article.

Work while you’re in school

I asked another family member, who has her PhD and masters, whether she had paid off her student loans yet. “My loans were reasonable because I worked during graduate school,” she explained. She taught at her university, and at secondary school, so she was able to borrow less and repay the loans more quickly. As long as you can keep up with the school workload, the way work helps you structure your day might even help you get better grades, according to this study. That’s not always a practical solution, however, for an intense professional degree such as medical school.

“It’s a balancing act,” said Caitlin. “I always worked part time throughout grad school, and when I coupled that with a full-time internship and full-time classes for even just part of one semester, I came pretty close to experiencing burnout. I would advise working part time if possible. It can help pay for rent, groceries, and other expenses that are necessary to having a decent quality of life, even if that income doesn’t make a huge dent in your tuition — which it likely won’t” she added.

“Plus, it always looks good to have something to add to your resume. You never know where it could lead you! The part time job I started my first semester in graduate school led me to discover what I wanted to do for my career after I graduated.”

What if you go to graduate school and find out you don’t like your field?

I recently spoke to a couple who had borrowed extensively for expensive professional degrees at private schools, only to find out after graduation that they were happier working in lower-paying non-profit jobs. Their loans were the cause of enormous financial stress. I asked Caitlin for her guidance, as she works in a different sector than she originally intended.

“For some people, this is harder if their graduate degree is more specialized. I am not working in the exact field my master’s degree is in, but I still apply things I learned in the program to my job. Also, having a master’s is becoming more and more necessary to be competitive in the job market today. Having completed any graduate degree is a significant accomplishment and becoming increasingly important to employers in some areas.”

The bottom line: make an informed decision

Graduate school isn’t something to be entered into lightly because you’re not sure of what career to pursue or your parents are pushing you towards a certain profession. It’s an investment. Like any investment, you will benefit from carefully weighing the costs, the risks and potential rewards.

 

A version of this post was originally published on Forbes.com

Is An Expensive College Worth It?

July 19, 2018

One of our daughters is preparing to head off to college in a few short weeks, which has me reminiscing about my own college days and the experiences and opportunities that await her as she enters this transformative stage of her life. It also has me contemplating the cost of these transformative experiences. Or should I say, “transformative expenses?”

As parents, we want our children to grow into successful, productive adults. For many parents, the path to that future success includes a college education. Unfortunately, the high cost of college can become a dream killer for parents and children alike; doubly-so if those college dreams include attending a prestigious private institution or studying abroad.

Current costs of college

According to the College Board, the annual cost of attending an in-state public college in the U.S. during the 2017-2018 academic year was approximately $14,490. Annual costs for attending a moderately priced private institution were more than twice that amount at $38,690.

Is it worth it? How we helped our daughter decide

When comparing university price tags, the question inevitably arises within the minds of parents – is this high-priced education worth it? In my daughter’s case, she originally applied and was accepted into a language studies program at The American University of Rome (AUR). While it would have been quite the experience for her to study in Rome, the annual $44,530 price tag was a deal breaker. She would also be forfeiting her Florida Bright Futures Scholarship, which pays 100% of her tuition if she attends college in our home state. Another deal breaker.

We encouraged her to look a little closer at some state schools and she found a program of study at Florida State University with an annual cost of $22,575 or about half the cost of attending AUR (even less with her Bright Futures scholarship). Not only is the cost savings significant, but the program she selected is an accelerated BS/MS program – two degrees at once! Lest you think she’s missing out on the opportunity to study abroad, I should add that she recently returned home from spending her high school senior year as an exchange student in Germany.

Re-thinking college altogether

Parents and students may also consider foregoing or postponing a college education, opting to work instead. Some very lucrative career fields do not require a college degree and can pay very well. In a 2017 report, Kiplinger rates their 10 best jobs that do not require a college degree. Many of them do, however, require some specialized training or certification. These jobs include plumber, sales representative, industrial machinery mechanic, aircraft assembler, surgical technologist, and more.

Checking at work

Other employers offer tuition assistance for students who desire to work full-time and attend college part-time. This was the case with our oldest daughter, who quite to my surprise, elected to enlist in the Army right after she graduated from high school. She’s embracing military life these days, and she can begin studying while she’s on active duty (with no small amount of cajoling, er, encouragement from her dad), or she can use her GI Bill benefits to help pay for college if she decides to leave the military and pursue another career.

College vs. retirement

Finally, it is also important for parents to remember there are many ways to pay for a college education, but relatively few ways to finance retirement. Money spent on an expensive college education is money that Mom and Dad did not invest for their own futures in retirement. If they misjudged their priorities and end up with too little retirement savings, their only fallback might be moving in with their well-educated children. This is a choice that is not likely to be popular with either side.

A better idea is to shop around for more affordable schools or consider other education opportunities after first making sure Mom and Dad are on track with their retirement savings.

 

A version of this article was originally published on Forbes

Beware Of This Unnecessary College Expense

July 17, 2018

We are quickly approaching that time of year when thousands of college students head off to school and the joys of communal living in dorms across the country. Perhaps you’ve noticed all the store fliers for big box stores that are filled with colorful images of hip looking dorm rooms.

It can be easy to go overboard when helping your child prepare for their first time away from home, but I’m here to remind you that college is expensive enough (I know, newsflash), and adding thousands of dollars in dorm shopping is really just adding insult to injury after tuition and books.

7 tips to minimize expenses when setting up a dorm room

Be careful where you shop

Shopping at high-end stores or your favorite store (where you love everything they make) is a bad idea. Does your young scholar really need a $250 bedding set? Assuming you don’t have extra bedding laying around your house that they can use, stores like Marshalls and TJ Maxx sell comfortable bedding sets for as low as $40-$60 dollars. If your young adult was like me in college, the bed will never get made anyway unless a parent visit is expected, so save your money.

You may also find deals online at sites like Overstock and Amazon.

Make a list and have a budget

Having a list will keep you focused while shopping and help you avoid buying things you don’t really need (trust me, your daughter doesn’t really need a faux-fur throw rug). There are a lot of lists online to use as a guide if you are not sure what you need for college, and your child’s university probably also has a list of necessary items.

Setting a budget of total spending ahead of time will also help you to resist those impulse purchases, although you may want to give a little bit of wiggle room for one or two things.

Check in with any roommates

Coordinate with any roommates to avoid having two microwaves or mini fridges. This is also an opportunity to discuss what items you think you need and what you can live without.

Look around your home for supplies

Before investing in color-coordinated folders, notebooks and pens, check around your home office and basement. A lot of people find they have leftover folders, notebooks, and pens/pencils at home from the high school years. Plus, your kid may not even need this stuff like you did in college – many students just use their laptop for notes.

You may even have things like coffee makers, clothes hampers, shower caddies and other goodies that can save you some money in supplies. That stuff adds up!

Take advantage of sales and coupons

Many retailers offer good sales and coupons this time of year for college stuff. Keep in mind though that those sales are often just ways for them to get you in the door so you can splurge on other stuff as well. Again, stick to your list and wait for those sales and coupons to save some money on the items you plan to buy anyway.

Talk to other people in college and use hand-me-downs

If you have older kids or friends with kids already in college, talk to them about what things they really needed and what things they took, but didn’t use. You may find you don’t need to buy that microwave or small TV after all.

They may also have some items they don’t need any more that they can give you or sell to you on the cheap.

Know the dimensions of the room

Knowing how much space you have is key before buying furniture for your room, if any. There are creative ways to save space like having elevated bed frames built – but make sure you are not buying furniture that doesn’t fit in the room.

The bottom line is that having the hippest, best-decorated room on campus is not going to be what helps your child excel in college, so be reasonable about what’s really needed, versus what just feels like a need. Going off to college is an exciting time for students and parents. Hopefully these hacks will help you prepare your child for a happy dorm life and save some money in the process!

 

How A 529 Account Can Help With Taxes Even If You Don’t Have Anything In It

June 12, 2018

We’ve all heard about 529 plans as a vehicle to save for college, but what about using them strictly as a way to pay, even if you don’t put a cent in before tuition is due? We typically look at these plans through a long-term savings lens to accumulate larger sums of money for a child’s education. But there is also a short-term view that allows you to use a 529 plan to save money on state income taxes, even if you haven’t been saving into a 529 all along — and it’s not just for your kids! If you’re thinking of going back to school, keep reading.

Who it works best for

This strategy really only works if you meet both of the following criteria:

  1. You live in a state that has income taxes AND offers a 529 tax incentive, for example, Minnesota residents can invest in any state’s plan and get a tax deduction, while Colorado residents are only incented to use the Colorado plan. California residents are out of luck — there is no tax benefit to contributing to a 529 plan.
  2. You will be paying qualifying college costs not covered by other forms of financial aid such as scholarships, grants and student loans.

How it works

Assuming you meet the above two criteria, here’s how you can still take advantage of a 529 plan even if you’re opening it just in time to pay college costs. Since I live in Colorado, I’ll use that as an example to illustrate how it works:

  • I want to go back to school to get a graduate degree, but don’t have any money saved in a Colorado 529 — my plan is to pay the costs out-of-pocket as I go.
  • Let’s say my first tuition payment of $10,000 is due in 2 weeks and I’m using money in my savings account to pay it.
  • I open a Colorado 529 plan and deposit $10,000 into the plan today. In two weeks, I send a payment directly from my 529 account to pay my tuition.
  • At tax time, I deduct $10,000 from my Colorado income taxes.
  • Important note about investment choice: Since I would be planning to spend the money in the account right away, I would make sure I chose the money market option and not one of the other mutual funds, out of the risk that the market is likely fluctuate during those two weeks and I could end up with less than $10k on my tuition due date.

Where the tax benefit comes in

Colorado allows me to deduct the full contribution of $10,000 from my state income taxes (assuming I have at least $10k in income) that year. Since Colorado state income is taxed at 4.63%, I would save $463 ($10,000 x .0463) in state income taxes the year I paid my tuition. Pretty good deal, right?

Make sure you read the fine print on timing

Most plans have a holding period that specifies how long money must stay in the account before it qualifies as a tax-deductible contribution, so you may have a plan ahead a few weeks. Colorado’s holding period is 7 days, which is why I used two weeks in my example above — I like to leave a little room for error.

A few other things to consider

Now, while most 529 plans are similar, each state has their rules around how much you can deduct on 529 contributions – and this would not apply in states that do not have a state income tax. Most states put a cap on how much of your annual contribution is deductible. So if I lived in Arizona, where it’s capped at $4,000 per year for married people, I’d probably only put $4,000 of my $10,000 tuition bill into my account, since that’s the max I can deduct in one year.

Before you start this strategy, make sure you’re clear on the rules for your state.

Maxing out all the tax credits

Paying for college may qualify you for various tax credits, so you want to make sure using a 529 this way does not disqualify you from receiving those. Costs incurred during the first four years of college may qualify you for the American Opportunity Tax Credit (check the income limits to see if you qualify).

For costs after the first four years (5th year seniors or grad school for instance), you may qualify for the Lifetime Learning Credit, again subject to income limits.

In my example above, paying the full cost of tuition by routing through a 529 would impact my ability to claim my credit, which may cost me more than I gain with the state income tax deduction. Assuming I would qualify for the federal tax credit it may make more sense for me to pay the first $4k straight from my savings for the federal tax credit, then run the rest through the 529 for the state tax deduction.

Consult your tax professional to make sure you are following the strategy that makes the most sense for you and capturing those valuable tax credits.

What if my job has a tuition reimbursement benefit?

As long as you’re on the hook to pre-pay your tuition, even if you’re later reimbursed by your job, you can still take advantage of this tax saving strategy.

One thing to think about, however, is if your job also has a student loan reimbursement benefit — if your job will reimburse you for tuition AND match some student loan payments, you may be able to get far more benefit from taking out a loan to pay your tuition instead of paying out of pocket. However, for people with kids in college, this can be a great way to save on taxes.

Paying for college can feel like an uphill battle at times. Hopefully this hack gives you one more tool to help you reach your family’s educational and financial goals!

You Probably Need A ‘Senior Year Fund’ In Addition To College Savings

June 07, 2018

While my friend Tania wrote about the surprise costs of senior year and my buddy Michael wrote about the wisdom of not having all your eggs in a 529 basket, the graduation of my oldest daughter Kate this month got me thinking, especially since my second daughter Rachel is going to be a junior. Parents of recent grads, I know you feel my pain — graduating from high school is expensive! I’m wondering if we don’t need to start also suggesting that parents save up a “Senior Year Fund.”

How much should you set aside for senior year?

In retrospect, having a fund for Kate’s senior year would have been extremely helpful to avoid busting the budget or even needing to dip into savings (luckily we didn’t have to go into debt, but some parents do) for those senior year costs. I’m going to be starting one ASAP for Rachel.

Post-high school plans matter

As I started to calculate what we’ll need for Rachel, I realized I’ll need even more than Kate. Kate is planning to major in Elementary Education, so her costs were a bit lower as she only looked at in-state schools. Rachel, on the other hand, is leaning towards majoring in business and is exploring private and out of state options – even though she will be getting the same 4 years of in-state cost assistance from us, the actual costs of applying will be higher.

Here is what my costs looked like for Kate and what I expect them to be for Rachel.

COST Kate (in-state) Rachel (out-of-state/private)
College entrance exam fees $46 $120
Kate just needed the standard ACT, whereas Rachel will need to take both the ACT and SAT, including the writing portions on both.
College entrance exam prep classes $600 $600
Kate didn’t need a great score, but she has test anxiety so extra prep was a big help. Rachel is a natural test taker but to get out of state tuition waived at a couple of her top choices she will need to score at least a 28, probably closer to a 30, on her ACT.
College application fees $85 $450
Again, Kate was looking at the two in-state options that excel at Elementary Ed. Rachel is looking at one in-state school, four private schools and five out of state public universities. Hopefully by the time of applications she will have it down to five but just in case…
High school tchotchkes $300 $100
Kate lettered in both softball and choir and she wanted her letter jacket ASAP. Rachel couldn’t care less about a letter jacket even though she could get one. There are still items that are “bundled” with the ordering of announcements that will add $50 – $100 to this total.
Senior trip $300 $300
We didn’t actually pay any cash for Kate’s trip to the west coast with a friend and her family but I used up airline points for a $300 flight. Rachel will probably get about the same. The total trip cost was at least double that, but those costs are on the kid in our house. If you plan to pay for a trip without your kid’s help – at least double that figure.
Official school events $400 $400
For prom we got a steal on Kate’s dress at a great local store but still easily spent $250 on that night. The “Project Graduation” party after graduation was about $50 and we spent $100 on reserved seating at the graduation ceremony. That would be frivolous for most people but it was the best way to get my parents into comfortable seats and near the elevator to be handicap accessible.
Graduation party $850 $850
The sad thing is that this was a low-key party and it still cost almost a grand. We hosted a reception for her guests and served dessert, but no meal. We did rent a room at a community center to reduce stress which cost about $80. We also had a family cook-out after the reception which was just grilling burgers, etc., but that isn’t cheap for 25 – 30 people. Plus, we hosted family at our home for several days, which meant more meals out to celebrate and more trips to the grocery store. Many of our friends had parties at home, but they served a meal so their total costs were similar.
Gift for the grad $475 $475
This is probably the most personal number of all, but we wanted to make sure that she had a new laptop heading off to school so we combined with grandparents to get her a new laptop. Thanks Mom and Dad!!
College deposits $400 $400
Just for the privilege of taking our money by the bushel over the next few years, we had to cut a couple of checks for admissions and reserving a dorm room months in advance.
Yearbook $50 $50
This was so early in the year that I don’t recall exactly how much, but this is about how much.
Yearbook ad $125 $125
Yes, in the brave new world of parenting, raising your child to adulthood isn’t enough. To prove that you love them, you must now buy an ad in the dang yearbook that they will probably only look at once, that I didn’t even remember writing by the time they were distributed. (can you tell I feel like this may be a little much?)
Senior pictures $200 $300
Kate has a friend who does photography, so we got a little bit of a price break. The good news is that with digital you can now get all the pictures and have more options, but then if you want to have a permanent keepsake… more $…
Gifts for friends $250 $250
We are blessed to have a great group of friends… and four of them have kids the same age as ours! So, with gifts for those kids and smaller gifts for the close friends or our daughter, it adds up.
College visits $400 $3,500
Again, Kate knowing she would stay in-state saved big bucks. Rachel will be a different story: we have 3 short drives, one medium drive and flights to NY, TX and CA on deck. Fortunately, I have hotel and airline points to cut those total costs, but then I won’t be able to use them for a family vacation, so it still counts in my book.
TOTAL $4,481 $7,920

So again, every grad and every family is different, but use my experience as guide to at least plan on the type of expenses you may run into.

Where should you keep this account?

I’d say that it’s best to just set up a separate savings account in your (the parent’s) name. This way it won’t be counted by college aid calculations as being as readily available to pay college costs, plus if your kid decides she wants to take off and backpack across Europe, you still have the savings to support other goals.

When should you start planning?

As soon as you can adequately estimate costs, I’d say start saving. Since Rachel is just finishing up her sophomore year, I only have about 5 months until the first costs start kicking in, but about 15 months til the actual senior year costs come up. If I want to have that account fully funded by the first day of her senior year, I need to start setting aside $528 per month today. Not to mention our continuing plan to provide her with some college funding assistance while also paying for Kate. The bottom line: date nights are about to get real cheap around the Spencer house!

It will be here before you know it

Whether your kid is a freshman or a toddler – setting up a dedicated savings account for those costs may be a real blessing by the time you see your child walk across the stage. Oh yeah, trust me, it will be here before you know it!

Rachel & Kate at Class of 2018 graduation – when did my babies grow up???

Why You Might Want To Think Twice About 529 College Savings

May 29, 2018

As a financial planner, I meet with people far too often who have a child who is just entering their sophomore year of high school and they have yet to start planning for college expenses. I don’t often recommend waiting until there are only two years before the funds are needed to pay for what may be a gigantic expense — the best recommendation I have for people who want to save for college is to start as early as possible.

However, I’m not sure that the most popular way to save for college, which is the Section 529 College Savings Plan, is the best way. Everything I read and what we often teach as planners is to start a 529 plan as soon as a child is born, make ongoing contributions and have family members add to them at birthdays and holidays. In spite of that, I’m personally not a huge fan of the 529 and don’t think the conventional wisdom surrounding 529’s is all that wise.

What I don’t like about 529 plans

Lack of flexibility

If your kid decides not to seek higher education after high school, getting the money that is inside the plan out for other uses has a cost. All of the growth of the funds becomes taxable along with a 10 percent penalty. If, alternatively, the assets were held in a brokerage account, capital gains would usually be taxed at a lower rate. Converting capital gains into ordinary income for the purposes of taxation is usually a horrible idea, and it’s even worse when a penalty is attached.

One of my favorite ways to see college funded is with the use of low cost index funds in the name of a parent. The upside is that it is truly an asset of the parent and is treated as such in the FAFSA formula. And, if the child opts for a path other than college, BONUS! You have an extra pot of money to fund retirement, pay down debt or check a few items off the bucket list.

Fees

Fees in many 529 plans are higher than you might be able to find with a low cost index fund. While we’ve all heard “past performance is not an indication of future results” a million times, we hear less about what has a higher correlation with future performance: low fees. If a 529 plan is a part of your college funding plan, do a quick fee analysis to make sure that you are not paying multiple layers of fees that drag down your performance.  The savingforcollege.com website has information on any 529 I’ve ever tried to review and is a great resource to help evaluate your alternatives.

Other ways to plan, save and pay for college

Choosing a lower cost school

Without question, the single biggest factor to consider regarding the funding of your child’s education is school selection. I’ve talked to too many parents who don’t want to tell their children “no” when it comes to their dream school, even if it creates a financial nightmare for the family. I’ve also talked to a lot of recent grads, suffering under the weight of crushing student loan debt, who wish that someone in their life had questioned why their “dream school” made sense.

There is some merit to kids doing two years at a community college or a low priced university before transferring to their #1 choice of school for the final two years. School choice is by far the best way to manage education costs, so make sure you are having those difficult but needed conversations with children about the economics of college. Does it make sense to pay $250k for a degree that results in a $35,000 starting salary?

Home equity line of credit

Another way I’ve seen people fund college costs is with a home equity line of credit. It usually beats the interest rate on Parent Plus loans and private student loan interest rates. It provides a lot of flexibility, given that you can pull money from it any time and pay interest only while the loan is in force.

After the last graduation, when flexibility isn’t needed, it can be converted to a fixed rate, fixed term loan or the payments can get accelerated. And while the interest is no longer tax deductible for this type of credit, it still might make sense. For homeowners with significant equity, this is a fabulous option and those who have smaller children can put themselves in position to use this pool of funds later in life by paying additional principal with each mortgage payment and trying to drive the principal balance as close to $0 as possible prior to needing to write a tuition check. Just remember that your home is on the line if you can’t make the payments though.

With as many options as there are for ways to fund college expenses, if your game plan involves a 529 plan perhaps it’s time to re-think your assumptions and strategy. What pools of money could you use instead of a 529? How can you reduce the overall need for funds? What happens if a child opts to not pursue college? There are a lot of variables in this equation and talking with a financial professional who has your interests first and a product sale last on the priority list could be a way to build the right plan for you and your children.