This Millennial Learned The Downsides of Private Student Loans The Hard Way

May 07, 2018

I recently spoke to a young man who was evaluating his options regarding a private student loan that was in default. He had attended a prestigious school where his mother was a professor, which allowed him to attend tuition-free. However, his family had not saved to cover the other costs of college, including room and board, books and fees, so he found himself taking on student loan debt in order to cover those costs. Due to his mom’s employment and his family’s financial situation, he was offered very little in federal loans, requiring him to turn to the private market to fill the gap.

Fast forward to graduation, when he moved across the country to a high-cost-of-living city to seek a job in a competitive field, and he found himself still looking for work when the 6 month grace period expired on his student loans.

What happened next

At this point he learned very quickly how federal and private loans differed — while he was able to defer his payments on the federal loans until he found employment, and then was able to choose an income-based payment plan to accommodate the fact that he was in a field that starts out with very low pay, with room for rapid salary growth, the lender of his private loans was less sympathetic. Within months, he was in default on all of his private loans, despite numerous attempts to work with the lenders to work out a way to stay in good standing.

Where he is today

Ten years into his career, this young man has been very financially successful. So much so that he’s been able to completely pay off his federal loan, but the private loans continue to plague his credit score. Despite the loans being considered in default, he has been making payments on them ever since he found employment, but due to the fees and interest that had accrued during those early months of unemployment, the payments barely make a dent. The rub is that the lender is unwilling to work with him to put the loans back in good standing unless he is able to catch up on all the missed payments from all those years before first.

Evaluating his options

One thing he’s been considering is whether to settle the defaulted loans, by offering to pay a lump sum and call the loans “Paid as Agreed.” The upside to this is that it will start the clock on those defaulted loans falling off his credit report after 7 years, with the negative effects on his credit score softening with each passing year. The downside is that in the near-term, his credit score won’t really see any boost — having a settled debt on your record is actually just as bad as having a defaulted debt on your record. But in the long run, settling will make the default history, eventually. He was disappointed to learn this, as he had been hoping that settling would at least show that he’d paid, but alas, that’s not how prospective lenders see it.

What he would have done differently

The key take-away from this tale of debt is not just that private student loans should be used with caution, as the flexibility offered by federal loans simply doesn’t exist, but also what he shared with me about his regrets. When talking through these consequences, he lamented that he wished that he and his parents had known what they were getting in to when they accepted these loans in the first place. He had borrowed this money in order to take advantage of a study abroad program, as well as to live on campus, when he could have just as easily lived at home.

In other words, if he’d known then what he knows now, he would have simply not taken the loans as he didn’t NEED them, they just enabled him to do some really cool things that other students (like me, for example) didn’t get to do because they simply couldn’t afford it. In retrospect, he actually couldn’t afford those things either, which just reinforces one of my favorite financial planning mantras: student loans are NOT financial aid.

 

 

Let’s Stop Calling Student Loans ‘Financial Aid’

May 03, 2018

One of the more common calls we take on our Financial Helpline these days is young professionals looking for guidance on paying down massive student loans. One recurring theme we’ve noticed is that many of these people didn’t actually understand what they were getting into when they accepted these loans. They had completed the Free Application for Federal Student Aid (or the FAFSA), which by its very name leads you to believe that it’s “aid” you’re receiving and not just a loan application in many cases. This leads me to state what seems obvious, but is often missed in this process: student loans are NOT financial aid. They are a financing mechanism. Those are two different things.

Defining ‘financial aid’

What is financial aid? Aid is money directly applied to reduce the tuition and related costs of a college education that does not have to be paid back if the conditions of receiving the aid are met. For those families with a zero or low expected family contribution (EFC) as determined by the FAFSA formula, they may be eligible for federal student aid in the form of a Pell Grant up to the annual limits. For those Pell-eligible students, their university may also determine that they are eligible for a Federal Supplemental Educational Opportunity Grant of $100-$4000. There is also a federal work study program where the student can earn money to cover books and incidental expenses.

Some colleges and universities offer additional direct aid, either needs-based or merit aid (scholarships). Keep in mind that non-federal aid, especially merit-based aid, often requires that the student maintain a certain grade point average (GPA) in order to be eligible. In general, the lower the family’s EFC, the more likely the student is to be eligible for direct, needs-based financial aid.

When not enough aid is offered (if any)

However, direct aid is often not enough to cover the full cost of tuition, housing and expenses, and the student and/or parents are offered the choice of borrowing the difference. Most university financial aid departments describe student loans as financial aid, but yet a loan is something that has to be repaid by the borrower. Even studentaid.ed.gov, the federal website on student loans, describes federally-backed student loans as something to, “help cover the cost of higher education.” It would be more accurate to say, “finance the costs of college or career school.”

The different types of student loans

Under certain circumstances, Federal Direct Student Loan interest may be subsidized, meaning that interest accrued on the loan is paid while the student is in school. There are also federally backed PLUS loans for parents with good credit. In addition, a parent or student may seek a private loan through a bank to meet financing requirements.

In almost all cases, the borrower must repay the loan plus interest. There are certain exceptions such as loan forgiveness for students who enter public service. Student loans stick with the borrower forever and generally cannot be discharged in bankruptcy. According to a U.S. News and World Report study, 68.8% of students who graduated in 2014 have student loan debt, with an average balance of $28,077.

Let’s call that for what it is – financing. That’s not aid. So what can students and parents do to maximize their eligibility for aid, as opposed to just financing?

Maximizing your eligibility for receiving aid

Start the financial aid application process early. Create your FAFSA ID and begin assembling a file as soon as financial aid season opens, which is October 1st of the year prior to your student starting the school year. Earlier is better, especially for applying for merit-based aid and scholarships. Your target school may have internal deadlines that are sooner than federal deadlines.

Run some numbers, and discuss them with your student. You can forecast your expected family contribution and even run a net price calculation for a particular college. Make sure your student fully understands the costs of college and what borrowing will mean for your child’s financial future.

Cast a wide net. Financial aid officers say that the most merit aid goes to students who will be in the top 25% of their class in terms of grades and test scores. Your student may get a much better financial aid package, with more aid and less loans, from a good school where they are a strong recruit. It’s normal for a student to fall in love with their top school, but if their second choice gives them a much better deal, that is well worth considering. Check out these tips for maximizing merit aid.

Research alternatives for paying for college. It pays to do your homework. Websites like Fastweb.com and ScholarshipExperts.com are helpful online tools. Check out your school’s guidance department, your local library, and community organizations for additional resources.

Most importantly, judge a financial aid package offered to your student by the amount of actual aid, not including student loans. Let’s stop calling student loans “financial aid.” After all, would you rather get a gift or a loan?

 

 

5 Myths About 529 College Savings Plans

May 02, 2018

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, Minnesota, Missouri, Montana 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 private primary school or high school and ultimately 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.

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.

How I Earned Two Degrees Without Student Loan Debt

April 27, 2018

Editor’s note: This post is part of our Personal Stories series, where our financial coaches share their own financial journey. We hope you enjoy getting to know us a little better and ultimately learn from our mistakes!

OK, so here’s the situation…

One of the biggest worries many young people have today and many parents have for their kids is the burden of student loans. Given its value in the job market, avoiding higher education doesn’t really seem like the best solution for most people. Fortunately, I was able to finish college and law school without having to take any student loans. Here’s how I did it.

“I got this”

Step 1:

The first step was taking AP (advanced placement) classes in high school, which allowed me to get enough college credits to graduate from college a year early. These classes are harder than the regular curriculum, but admissions officers will often look more favorably on lower grades in an AP class than higher grades in the corresponding non-AP class. Even if your child’s high school doesn’t offer AP classes for certain subjects, they may be able to take the AP exam for those subjects and get college credits anyway if they score well enough. This is what I did for history and government.

Step 2:

The second thing I did was to choose schools (in my case, NYU for college and USD for law school) that gave me significant scholarships. This may force your child to attend a lower ranked school that offers a scholarship rather than a higher ranked one that doesn’t, but a study found that students with comparable abilities making this choice earn about the same income either way.

In other words, it’s more about the student’s aptitude and skills than the name on their degree. (Exceptions are for students from lower-income households and business majors since some businesses only recruit from top schools.) Students who don’t qualify for AP classes or scholarships could follow a similar strategy by attending a much lower cost state school or even a community college and then transferring to a more prestigious school, which is where their 4-year degree would be from.

Step 3:

Finally, I worked while in college. I spent a summer selling cutlery in people’s homes (which helped get me my first job in the investment brokerage business), worked for the school’s admissions office, sold advertising for the school paper, and worked as a teacher and proctor for a test prep company. One study found that students who work part-time in school actually do better academically.

At the end of the day

The end result of all this is that I was able to avoid graduating with burdensome student loan payments. (I did technically have a small student loan from undergrad that I applied for by accident but I quickly paid that off.) This made it much easier to avoid other types of debt and save for the future.

If I could turn back time

The only things I might do differently would have been to apply to more colleges (I only applied to NYU early decision) to see where else I could have gotten scholarships to and perhaps to not go to law school at all. While the JD didn’t cost me any money, there was a significant opportunity cost of not earning much for 3.5 years since I never intended to use the degree. That’s a pretty elementary mistake for a former economics major!

If I could tell you just one thing

The one thing I would tell students and parents is to think of education the same way as a consumer purchase or an investment. Focus on value rather than always the “best” or most prestigious option. They may yield the most short-term emotional benefit but they often cost more, both emotionally and financially, in the long run.

 

How College Financial Aid Packages Are Affected By What You Own

April 09, 2018

If you have a graduating high school senior and haven’t completed the FAFSA form yet, it’s time to get moving — some aid is given out on a first-come, first-served basis, and since you can now start filing as early as October of the year prior to the school year where the aid will be used, time is of the essence. As you prepare to complete the form, it’s important to understand how different assets, such as your retirement savings or a 529 plan, will affect your eligibility for aid.

File, no matter what

Even if you don’t think you’ll qualify, it’s worth it to file. Families with significant savings can be offered aid, depending on circumstances.

Because the rules recently changed to have the upcoming school year’s aid based on the tax situation almost two years prior (so fall 2018 aid is based on your 2016 tax return), any income planning you may be contemplating for middle school and early high school-aged kids, like maxing out retirement accounts in the years leading up (knowing that retirement account contributions made during the base year are added back for expected family contribution calculation purposes), needs to take place during your child’s freshman spring/sophomore fall year or earlier.

FAFSA Base Year
Tax Year School Year Status
2016 2018-2019 freshman
2017 2019-2020 sophomore
2018 2020-2021 junior
2019 2021-2022 senior

This change not only makes tax time less frantic, but in cases where grandparents or other non-parental family members wish to help out with costs, it’s especially favorable due to the fact that such gifts are considered income to the student, which has the most detrimental effect on aid calculations.

A student’s aid package can be reduced by up to 50% of the student’s income during the base year. Since there’s now an almost 2-year lag between income and aid, anything after your child’s sophomore year of college won’t affect the FAFSA (assuming your child is on the 4-year graduation plan). Besides income, the FAFSA asks about a variety of different savings and asset values. Here’s how each affects the aid package that is offered to your student:

529 College Savings Plans and Coverdell ESAs

The value of 529 plans and ESAs are counted as parental assets if the parent is the owner. This is a good thing because only a single-digit percentage of a parent’s assets are considered available to spend on one student’s college. Investments or other savings in your child’s name count much higher at 20%! 529 accounts owned by grandparents or other non-immediate family members are not included as assets, but are treated as income to the student when distributions from these accounts are used to pay expenses.

You may want to wait until the second half of their sophomore year or later to use the grandparents’ 529 plan to pay expenses, if possible.

Retirement accounts

You do not have to list the value of any retirement accounts like your 401(k) and traditional or Roth IRAs. However, if you take advantage of the Roth IRA’s penalty-free distribution feature to help pay for college, that amount will count as income on the FAFSA two years after. Consider waiting until spring semester of sophomore year or later to exercise this option if needed, similar to using a 529 owned by a grandparent or other non-parent.

Savings in your child’s name

Custodial accounts, UGMA/UTMA accounts, etc. are counted as assets of your child and 20% of the value is expected to be contributed toward educational expenses each year. If these assets are for college purposes anyway, consider transferring them into a 529 savings plan, where they will count as parental assets and have a less detrimental effect on aid offered (and you might receive a state income tax benefit as well).

Keep in mind that any interest, dividends or capital gains earned from accounts in your child’s name is considered your child’s income, of which 50% is expected to be contributed toward educational expenses.

Taxable investment accounts

Mutual funds and other brokerage assets held by parents are counted on the FAFSA. Dividends and capital gains earned in taxable brokerage accounts count as income. Distributions from a mutual fund or brokerage account to pay for college count as income.

Life insurance and annuities

Any cash value built up in insurance policies does not have to be included. Before you move any of your child’s money into an annuity though, consider that if you have to use the funds to pay for college, the distribution will show up as income in future years. This is more detrimental than just holding the funds in savings or transferring to a 529 plan.

Other assets

Home equity or the difference between what your home is worth and what you owe is NOT counted on the FAFSA. Keep in mind, however, that certain schools may still ask for this information when figuring eligibility for need-based aid from the school. If more than 50% of a business is owned by your family and there are 100 or fewer full-time employees, you do not have to include the value of your small business.

The bottom line is that if you have middle school aged kids, knowing which year is the first base year for the FAFSA may alter your family’s plans to do things like take capital gains or convert pre-tax retirement assets to Roth. Both are income-producing activities that can reduce the amount of aid offered your child. Additionally, if you have funds in your child’s name that you intend to use for college anyway, it may make sense to shift those into 529 plans simply to reduce their effect on aid offered.

Attending College In 2018-2019? Complete The FAFSA Now

October 04, 2017

I know that it feels like this school year just started, but for people looking to maximize financial aid for next fall, it’s time to start thinking ahead already. As of October 1st, the 2018-2019 Free Application for Federal Student Aid (often called the FAFSA) is available for submission and includes a new and improved IRS Data Retrieval Tool, which makes filling it out much simpler (and safer)!

Why complete the FAFSA ASAP?

If you think you or your student may qualify for any need-based aid, it’s essential to file your form ASAP — many states and schools have a limited amount and it’s literally first come, first served. And since the “base year” that the form uses to evaluate your income and assets is now basically two years ago, you don’t have to wait until your taxes are done to file a complete form — the 2018-2019 form is based on your 2016 taxes, which, if they haven’t been filed yet, are due by October 16th this year at the very latest to avoid late-filing penalties.

In other words, you already have the numbers you need to complete the form for next year. Why not get a head start and take one thing off the list at tax time?

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Financial Advice Every New Grad Should Take

May 19, 2017

I’m at that age where my oldest child will graduate from high school next year and several of our friends have kids graduating from high school or college this month.  It got me thinking about graduation speeches and what I wish someone had told me about personal finance when I was their age.  So here is the world’s shortest, 3 point graduation speech:

  1. Avoid debt, even student loans. My kids are blessed. We have scrimped and saved so that they will have enough to cover 4 years of costs at an in-state university. They know that if they go to a private school or an out-of-state school that any difference in cost is on them. My younger child is considering one out-of-state school but only because they offer in-state tuition if her test scores are high enough. I have a nephew from Texas who went to Kansas State University because the scholarships he received made it the same or less than in-state costs at the University of Texas.  This won’t be the reality for a lot of kids, but the point is to do whatever you can to avoid debt for anything less than a masters degree – apply for scholarships, take a year off to work, work part-time during school, look into the military if that interests you or consider community college. This way you have the freedom of being debt free when you finish or if you do need advanced education or training, you will have less total debt and hopefully more income to counter.
  2. Live on 2/3 of your income. The wealthiest relative I have was taught this at his small high school in southern Kansas decades ago. He always saved 1/3 of what he made. Today I translate that to putting at least 10% into the 401k – or at least what the company will match, then increase it by 1% each year until you hit 10% or more (automate this with the rate escalator if your employer offers it) – and then save 1/3 of your take home while living on other 2/3. If you do have student loan debt, I would count paying down your debt as part of the saving piece. This may mean some sacrifices such as getting a roommate, not buying a new car, not upgrading your phone every year, etc., but if you live this way from the start, you get used to it. Imagine how quickly your loans could be paid off or you could save enough for a house down payment or you could take that trip of a lifetime by dedicating 1/3 of your take home pay to these goals! This is also important for when you start a family. The challenge that a lot of younger Baby Boomers and Gen X’ers like myself faced is that for many of us our parents couldn’t tell us or show us how stressful life can be with two people working full-time, paying for child care, etc. This way, if you and your spouse/partner have each been living on only 2/3 of your income all along, you can much more easily afford child care or if one of you decides to cut back to part-time for awhile or take a couple of years off, it won’t blow up your budget.
  3. Have a side hustle. My best friend realized last year that he could no longer coach his kids’ teams since they were both in high school, and he found himself with a void in his life. For years he was busy but fulfilled from coaching kids – he loves sports and he loves being around kids. To fill the void, he decided to try officiating as a way to stay around youth sports and get paid and he LOVES it! He has an outlet for his passion and the extra money is going to help put his kids through college. It is ideal if you can find a hobby that pays, but even if it doesn’t pay, we all need something outside of work. One way or another, whether it is for pay or volunteer, your life will be richer and more rewarding and it will make those inevitable rough days at work much easier to deal with.

Congratulations to the class of 2017! There are a lot of other important life lessons in the real speeches you will hear but I hope that when it comes to your money you remember to avoid debt, live on 2/3 of your income and have a side hustle! May you never lose faith in yourself, your future or your fellow Americans.

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The Surprise Costs of Senior Year of High School

May 16, 2017

I was recently talking to a friend of mine whose son is about to graduate from high school and she was telling me how expensive it is to have a senior and how she wishes she would have started planning earlier for all of the money she had to fork out. Below are some of the things she wished she would have saved for:

College Entrance Exam fees:  Most people forget to factor in the cost of college entrance exams. The SAT with the essay is $57, although the fee may be waived depending on your income. The ACT with writing costs $58.50. Similar to the SAT, the ACT can waive fees for low income students.

College entrance exam study programs: Initially, my friend used free programs like the ones at KhanAcademy.org  and her local library to help her son prep for the college entrance exams. He ended up needing a combination of online and classroom style learning, so she also enrolled him in a college exam prep program, which can easily cost over $1,000. She suggests working with your child’s school counselor to research and review different tutorial programs to find the best one to fit your child’s need and your budget. She also suggests outright asking for discounts and combing websites like Groupon and Living Social to look for discounted college prep tutoring.

College Application Fees: The average college application fee in 2016 was $42. Her son applied to six colleges so the costs added up quickly. Although my friend did not qualify, you may be able have application fees waived based on income, applying online, being an alumni, or visiting the college. She suggests you and your child talk to the school counselor early about ways to save on college application fees.

High School Tchotchke: My friend was blindsided by all the things that came up “senior.” Senior mugs, flags and tee-shirts were a few of the items her son wanted. Then she got hit again with senior pictures, yearbook, varsity jackets and the class ring. The yearbook and pictures alone can climb into the hundreds of dollars. Give your child a budget as to what he can spend.

High school events: Senior trips, college visits, graduation parties, prom, post graduation parties and the wardrobe to attend the events can easily add up to over $1,000. She had to give her son a reality check that he could not rent a helicopter for prom. She suggested saving in advance and talking to your child about  your budget and start shopping early for clothes. She rented a tux for her son’s prom but his date also rented her dress. Her son and his date went to a beauty college instead of a salon to cut his hair and style hers. A little researching and planning can save hundreds of dollars.

If you’re planning now for your child to head into senior year, use checklists like the one from Consumerist.com to estimate costs and start saving monthly. If your child is planning to work over the summer, have them contribute by saving part of their income to cover expenses. This may mean opening up a savings account and having part of your child’s paycheck automatically deposited into the savings account. Ultimately, the more planning you do and the more dialogue you have with your children about how much they can spend, the better you can manage the senior year dollar drain.

How Your Kids Can Avoid Summer Brain Drain

May 09, 2017

I can’t believe it’s May already. Like many parents, I start planning for the summer as the school year starts to wind down. Working from home, I tried to let my kids stay home for a few weeks last summer. After a week of fights with Barbie dolls as the weapon of choice, meltdowns in the middle of my conference calls, and almost being decapitated during a spontaneous pillow fight, I gave up and started looking ways to survive my kids being out of school for the summer.

I wanted to prevent the “summer brain drain” when kids can lose over two month of learning over the summer, so I focused on reading programs. Local libraries have excellent free summer reading programs and companies such as Barnes and Nobles, Half Price Books, and even TD Bank offer reading programs as well. The Balance has a great list of summer reading programs that they are currently updating for 2017. Contact your local bookstores and consider using it to find free local programs in your areas.

Some schools offers summer academies, which offer programs for students from struggling to gifted. Depending on your school system, the programs may go from elementary to high school. Even better, the programs last a full school day and may be free.

For those of your who may want a more focused reading/academic program, check out your local college for summer reading programs. Some of these programs that go from entering kindergarteners to 12th graders. They are typically conducted once a week for about 2 hours with a reading assignment to complete between classes. Learning Centers such as Sylvan Tutoring, Huntington Learning Center,  Kumon offer comprehensive summer programs and others, such as Mathnasium, focus on math.

Summer reading/academic programs are one of the easiest ways to distract your kids in the summer. Depending on your budget, you can find everything from simple programs at little to no costs to more comprehensive programs. Finding one for your kids can help them start off their new grade a step ahead of the other students and help you preserve your sanity during the summer months.

 

 

 

Free College – It’s Not Just a Political Slogan Anymore!

April 21, 2017

In a development that has young people (and their parents) celebrating a little bit, New York state has become the first state in the country to offer free tuition for two AND four year degrees to in-state residents at state colleges/universities. For many families, this is going to open up new possibilities and some kids who thought college was out of reach are going to get a degree. There is no doubt that this program will benefit lots of families. But just like there is with any program that is rolled out, there will be some “catches” or limitations. For those who are thinking of moving to New York in order to take advantage of this program, there are some limitations you should know about:

  • There is an income cap of $100,000 currently and that will be increasing annually so high income families will not be eligible for this program.
  • The program is able to be used for two years for a two year degree and four years for a four year degree. So if like ~80% of my college rugby team, it takes longer than four years to graduate, the program won’t be available in your second or third senior year.
  • Upon graduation, if the student doesn’t stay in New York for two years or four years (depending on two or four year degree), the scholarship money (the program is structured as a scholarship equal to tuition, not room/board/books/etc.) that was received is converted to a student loan.
  • The scholarship, as noted in the prior bullet, is only good for tuition.  Books, fees, housing and incidentals aren’t covered by this so students without a strong support network will be required to work or use student loans to cover the remaining costs.

These are a few of the potential drawbacks of this from the student’s standpoint. New York taxpayers will have the drawback of funding these costs upfront and the goal of the legislature is to increase the overall education level of the workforce, thereby increasing incomes of those remaining in the state after graduation and those incomes will be taxed in New York state. In theory, this program could pay for itself over a long enough time frame. Whether it does or not or whether that even matters is a topic that I’m seeing debated on social media currently and I’ll avoid that debate for now.

There is definitely a lot of discussion, debate and movement toward making college a less expensive proposition. Lots of municipalities are approaching this in different ways. I’m not sure how it will progress, but as the parent of one child in college and two on the way, I’m DEFINITELY interested in seeing how this plays out. As more states propose and pass legislation, I’ll be potentially considering a move to a state that offers a sweetheart deal!

 

How Should You Invest In Your Roth IRA?

April 20, 2017

If you’re like many people I’ve talked to recently, you may have decided to contribute to a Roth IRA before the deadline on Tue. However, it’s not enough to open an account and fund it. After all, a Roth IRA is simply a tax-sheltered account, not an investment. You still have to decide how to invest the money. Here are some options to consider:

Use it as an emergency fund. If you don’t have enough emergency savings somewhere else, you can use a Roth IRA as part or all of your emergency fund since you can withdraw your contributions tax and penalty-free at any time and for any purpose. (Earnings are subject to taxes and a 10% early withdrawal penalty before 5 years and age 59 ½ but the contributions all come out first.) In this case, you’ll want to keep it someplace safe and accessible like a savings account or money market fund. Once you accumulate enough emergency savings elsewhere, you can invest it more aggressively for retirement.

Save for a short term goal. A Roth IRA can also be used penalty-free for a first-time home purchase (up to $10k) or education expenses. If you intend to use your Roth IRA for either goal in the next few years, you’ll probably want to keep it in savings.

Choose investments that complement your other retirement accounts. For example, you may want to use your Roth IRA for investments that may not be available in your employer’s plan like real estate, gold, commodities, emerging markets, international bonds, and microcap stocks. They can help diversify a more traditional mix of bonds and large and small cap US and international stocks.

Choose a more conservative mix for early retirement. If you’re planning to retire before becoming eligible for Medicare at age 65 and are planning to purchase health insurance through the Affordable Care Act (assuming it hasn’t been repealed and replaced), a tax-free Roth IRA can help reduce your insurance costs because the insurance subsidies are based on your taxable income. Since a large percentage of the account may be coming out over a relatively short period of time, you may want to invest it more conservatively than your other retirement investments.

Choose more aggressive investments for long term tax-free growth. If you’re not planning to withdraw your Roth IRA early, you may want to take the opposite approach and use it for the most aggressive parts of your portfolio. That’s because the account is growing tax-free and may be the last to be touched. (It helps that Roth IRAs aren’t subject to required minimum distributions.) Some examples of more aggressive investments would be emerging market and small and micro cap stocks.

Keep it simple. If this all sounds confusing and you want to just keep your investing as simple as possible, you can look at each account separately. For example, you might choose a target date retirement fund for your Roth IRA since it’s a fully diversified one stop shop that automatically becomes more conservative as you get closer to the retirement date. All you need to do is pick the one with the date closest to when you think you’ll retire and set it and forget it. If you want something more customized, you can also use a robo-advisor or design your own portfolio based on your particular risk tolerance.

Like all financial decisions, your choice begins with your goal. Are you trying to save for emergencies? Do you plan to use the account early or late in your retirement? Or do you just want to keep things as simple as possible?

 

 

 

How to Better Prepare Your Kids to Manage Money in College

April 18, 2017

This is the season where I start to get invitations to friends’ and relatives’ kids’ high school graduations. It never fails to amaze me how quickly they grow up. As I start to think of these kids graduating, I realize many of them will be getting ready to go to college, completely unprepared for how they will handle money.

That was the case with me. My family never discussed money with me and when I went to college, the peer pressure of having to look a certain way and the desire to hang out friends quickly left me broke, no matter how much money I had. If I could go back to 1990, ten years ago when I graduated from high school (please allow me to remain in my mathematical delusion), I wish my parents would have better prepared me for managing my money in college by doing the following:

Give them an allowance that includes ALL of their monthly expenses. My parents gave me money as I needed or wanted. Typically, I would ask for money for the movies or to cover my expenses for being on the track team such as travel, hotel and sneakers…oh and I forgot – the money to get my hair done. I learned in college that I was high-maintenance and could not afford my own upkeep.  Consider adding up how much you spend on your kids’ activities, personal care and outings and giving it to them to manage themselves.

Teach them how to think about upcoming expenses and budget the money they have. One of my favorite quotes about budgeting is from John Maxwell, “A budget is telling your money where to go before wondering where it went.” Walk your child through the budgeting process to get them thinking about upcoming expenses and how to create and stick to a budget.

A friend of mine opened a checking account for her child in high school.  She deposited money into the account monthly for his expenses. She helped him create a budget using online software like Mint and she had a weekly budget meeting with him.

Her son had to show her how he spent the money for the week and how much he had left. She did this while he was in high school so the money management habits will kick in by the time he went to college. Consider doing something similar with your child to help create the habit of budgeting and thinking through their financial needs.

Teach your kids about credit. When I was in college, it seemed like every credit card company known to man was on my college campus. Even though it has gotten better, credit card companies still market to college students who have no idea what they are signing up for.

Luckily, the CARD Act of 2009 provided some level of protection to college students. The act cracked down on giving credit cards to students under the age of 21. Generally, a jobless student cannot get a credit card without proof of income or a co-signer, but eventually, they will be eligible for a credit card.

I thought credit cards offer “free” money that I could take my time paying back. I had no idea that in addition to paying for the items I bought, I was paying an additional 25% in interest. Help your children understand that the money is not free and that the less they pay on their credit card, the more money they will pay in the long run.

If you decide to give your child a credit card, first make she has good money management skills. Control the credit limit and check in weekly at first to make sure the credit card is being used wisely. Then switch to monthly meetings.

The last thing you want is for your child to walk out of college in credit card debt and with bad money management skills. Teach them good money management habits now to help them build a good financial future. What better graduation gift is there?

 

 

 

Quiz: Do You Get the Most Out of Your Benefits?

April 03, 2017

Today is Employee Benefits Day. How will you celebrate? Don’t worry. Celebrating Employee Benefits Day does not require you to make a special trip to the party store or spend a single dollar.

In fact, the best way to celebrate it is to recognize and appreciate the value of your employee benefits and to maximize them for your personal financial situation. Don’t know where to start? Take this quick quiz to test your benefits knowledge.

1) You have decided it’s time to prepare a will. Where might you most likely find links to basic estate planning tools?

a. The public library

b. Your employee assistance program (EAP)

c. Your retirement plan provider

d. The HR department

2) Next year you plan to get laser eye surgery to correct your vision. Where is the best place to save extra money pre-tax to pay for it?

a. A health savings account (HSA)

b. An employee stock purchase plan (ESPP)

c. A flexible spending account  (FSA)

d. A deferred compensation plan

3) Where you can save and invest for retirement so that the income after age 59 ½ will be tax-free?

a. Non-qualified stock options (NSOs)

b. Nowhere – there’s no such thing as tax-free retirement income

c. A cafeteria plan

d. A Roth 401(k)

4) During this year’s open enrollment, you choose a high deductible health plan (HDHP) because of the lower premiums. You have the option to save money pre-tax in an HSA to cover the deductible and a portion of out-of-pocket expenses. You should:

a. Skip the HSA. The point of choosing your health insurance was to save money.

b. Contribute no more than $1,000.

c. Contribute the maximum ($3,400 for an individual and $6,750 for a family in 2017). If you don’t need to use the money, you can roll it forward to future years.

d. Contribute no more than $1,500.

5) Taylor takes the train to work every day, Max drives and parks in the public garage and Jenna rides her bike. Who can use a pre-tax commuter benefits account offered by their employer?

a. Only Taylor. The point of pre-tax commuter benefits is to encourage employees to take public transportation.

b. Taylor and Max can contribute up to $255 per month in 2017, but not Jenna. There are no employer-sponsored bicycle benefits.

c. Everyone but contributions are from the employer only.

d. Taylor and Max can contribute up to $255 per month in 2017. Jenna can’t contribute pre-tax, but she can participate in her employer’s bicycle reimbursement program, for up to $20 per month in eligible expenses.

6) According to our recent financial wellness research, the single most important tool an employer can offer to boost employee retirement preparedness is:

a. A “bank at work” program

b. A retirement calculator

c. Incentive stock options (ISOs)

d. A target date fund

7) Which benefit replaces your income if you have an injury or illness which is not work-related?

a. Disability insurance

b. Long term care insurance

c. Workers compensation

d. Unemployment insurance

8) According to the 2016 Milliman Medical Index, what is the typical total cost for family coverage in an average employer-sponsored group health plan?

a. $25,826 for a preferred provider organization (PPO) plan

b. $6,742 for a health maintenance organization

c. $43,350 for a high deductible health plan (HDHP)

d. $15,003 for preferred provider organization (PPO)

9) Your employer will reimburse you up to $3,000 for an undergraduate course, a graduate course or a professional certification. How will the reimbursement be taxed?

a. Reimbursement for a professional certification will be taxed  but not reimbursement for college/university courses

b. Reimbursement for college/university courses will be taxed  but not reimbursement for professional certification

c. Tuition reimbursements are generally included in the employee’s taxable income

d. Tuition reimbursements of less than $5,250 are generally not included in the employee’s taxable income

10) What type of pre-tax benefit can you use to pay for after-school care expenses for your children?

a. Health savings account

b. None – after school care is not eligible for reimbursement

c. Education savings account

d. Dependent care flexible spending account

See the answers in italics below. How did you do? If you scored a 9 or higher, congratulations! Chances are that you see your employee benefits as an integral part of your overall compensation.

If you scored an 8 or lower, you may be leaving money on the table by not taking full advantage of everything your employer offers. If you have access to financial coaching via your workplace financial wellness program, consider setting up a time to talk to a planner about how you can fully maximize the value of your employee benefits. In addition, check out the blog posts for the rest of this week, which will focus on various aspects of your benefits.

Answers:  1 – b, 2 – c, 3 – d, 4 – c, 5 – d , 6 – b, 7 – a, 8 – a, 9 – d, 10 – d

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

How to Save Your Kids $70k

March 17, 2017

My daughter had a flat tire and I went over to put the spare on and drive it to the shop. Unfortunately, the toy the manufacturer calls a tire iron was never going to get those bolts loose even with my extra pounds of “leverage.” Fortunately, two juniors drove by and asked if they could help. One of the guys was on his way back from automotive tech class and had a trunk of professional equipment. We had that tire swapped out in no time and I asked more about their plans.

The guy who wants to be a mechanic has plans to work out of high school while becoming an A.S.E. certified mechanic. His buddy is learning welding and plans to become a master welder. Because they started looking into these programs a couple of years ago, they have a plan for a career with minimal, if any debt. What a great situation for a 16 year old kid!

Think about it. A typical student who doesn’t do the work upfront could lose $65,000-$70,000 just from one extra year of college costs, student loan interest and lost wages!  So what can you do now to save your kids $70,000?

1. Meet with the high school guidance counselor when your student is in 8th grade. Find out what career exploration programs the school offers.

2. Encourage your child to take the aptitude tests and discuss the results with them. Ask them about what they enjoy doing in general terms.

3. Work with your child and the counselor to find the intro classes for a couple of their interests that can be electives during their freshman and sophomore years.

4. If your student has found something that excites them, now you can focus on their electives, job shadowing and school choices.

Look, not every kid will have it figured out by 16. I know that I didn’t and that’s okay. But if they do find a vision, whether they want to be a surgeon, programmer or a welder – those 4 simple steps may be your $70,000 graduation gift!

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You Got Your Financial Aid Packages – Now What?

March 07, 2017

I was recently talking to a friend at a party about college. Her daughter is a senior and will soon be going off to college. Her daughter was accepted to four different schools, all with varying financial aid packages, and her daughter’s first choice did not offer the largest package so she was considering her second choice. I told my friend to consider doing the following:

1. Review all of the financial aid packages to determine which package is the best vs. the largest. Consider how much of your need is being met along with how your need is being met. Is the largest package with the most loans really better than the smaller package with more grants and a small out-of-pocket expense? Luckily, the CPFB web site has a tool that can help you compare the financial aid packages of up to three schools.

2. Your financial aid award package is not written in stone. My friend recently filed for divorce so her reported income on the financial aid form is vastly different from her upcoming income. I encouraged her to contact the potential college financial aid offices and appeal the award. She can do this in writing and I also encouraged her to ask for a follow-up appointment.

If your financial situation has or will change, consider appealing. Most colleges have a formal appeal process. Contact the college for more details.

3. Use the best award packages to leverage a better financial aid award package from the desired school. Since my friend’s daughter was accepted to multiple colleges and she was going to appeal all of the packages anyway, I told her to use the best packages to get a higher award package from her first choice school.

Review the award packages and what they mean for your family carefully. Consider appealing if you feel you have a case based on a changing financial need or if you can leverage multiple offers. As you go through the process of picking a school, remember the old adage, “You don’t get, what you don’t ask for.”

Can You Deduct Your Student Loan Interest?

February 22, 2017

Don’t you just hate making student loan payments? Besides the fact that your student loans (hopefully) enabled you to earn a degree that allows you to command a higher income than you would without it, at least there is a small tax benefit to those loans for those who qualify. Here’s the skinny on what you need to know to maximize your deduction:

There are income limits. If you’re single and your AGI exceeds $80,000 or you’re married and your combined AGI is over $160,000, you can’t take any deduction at all. There are also phase-outs, which means you can still take some of the deduction but not all of it. Those limits start at $65k for single and $130k for married people. If you use tax software or a tax professional to prepare your taxes, the amount will be figured for you.

You can only deduct the first $2,500 paid in interest each year. Probably the biggest mistake I’ve seen here is when people think they can deduct payments. It’s actually only the interest you can deduct, so even if you’ve made well in excess of $2,500 in actual payments, you may not have a $2,500 deduction.

Your loan provider will tell you how much interest you paid. You don’t have to do the math to figure out what portion of your payments were for interest and which went toward the principal. Just look for Form 1098-E from each of your lenders. If you’re signed up for electronic delivery of statements, then you’ll probably have to log in to find your form. Look for a link to “Tax Documents” if your lender doesn’t make it obvious on their home page.

You can deduct interest from multiple loans, but they have to be qualified. If you have multiple loan accounts or lenders, you can add up all those Form 1098-E amounts for your total deduction. But the loan has to be considered a qualified student loan. If you refinanced by taking out a home equity  or 401(k) loan or even just borrowed from a family member to lower your rate, you can’t deduct that interest.

If you claim student loan interest on your tax form and the IRS doesn’t receive a corresponding 1098-E from a lender, you can count on getting a letter asking you to prove the interest was paid on a qualified student loan. If you’re not sure if your loan is considered qualified or not, ask them for your Form 1098-E. If they are unable to provide one, it’s not qualified.

I know that paying student loans is no fun. Hopefully, this small tax benefit will offer a little silver lining though. (In addition, reflect on what your finances would be like if you hadn’t earned that degree.)

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How to Choose a Student Loan

February 07, 2017

With the average cost of college being north of $20,000 for a public in-state school, student loans have become a big part of student’s financial aid packages. The two types of student loans are federal and private. There are important differences between them and knowing the difference can help students make the most informed decision.

Federal student loans are loans made or guaranteed by the government and private loans are essentially non-federal student loans made through lenders such as banks, credit unions, state agencies or schools. With the benefits of federal student loans, comes harsh consequences for default such as wage garnishments, difficulty discharging if you file for bankruptcy, possibly lost tax returns, and even Social Security payments. The three main types of federal student loans are:

Direct student loans, sometimes called direct Stafford loans, have low fixed interest rates and offer a variety of repayment options and forgiveness programs. They have limits as to how much of a loan you can get, which is different for undergraduate and graduate students. There are two basic types of direct student loans:

  • Direct subsidized loans are available to low income undergraduate students. Interest typically does not accrue while the student attends school, during the 6-month grace period after college and if student loan payments are delayed. Loan limits tend to be lower than the loan limits of unsubsidized loans.
  • Direct unsubsidized loans are available to undergraduate, graduate and professional students regardless of financial need. Interest accrues while the students are in school, during the grace period and during any student loan payment delays.

Perkins loans are fixed low interest loans for low-income undergraduate, graduate or professional students with financial needs. Like the subsidized loans, interest doesn’t accrue while you are in school and during your grace period, which is longer than the grace period for direct loans. Perkins offers a ton of cancellation options for a variety of situations and professions. You also have to attend a school that offers Perkins loans and the school determines the loan amounts.

PLUS loans are fixed rate loans for graduate or professional students and parents of dependent undergraduate students. To qualify, the borrower must not have an adverse credit history and interest accrues even when the student is in college. PLUS loans are eligible for nearly all of the repayment options offered by the US Department of Education. Parent PLUS loans are eligible for most of the repayment options.

Private loan interest rates and benefits vary per institution. Some offer a variety of repayment options and programs if you experience a hardship, so compare loans before making a decision. Typically, with private loans:

  • The interest rates tend to be higher than most federal student loans
  • They offer almost no loan forgiveness programs, cancellations or the variety of repayment options offered by federal loans
  • A credit check and possibly co-signing may be needed to get a loan
  • You can generally borrow a higher amount than you can with a federal loan

As you weigh your options consider the following:

Can you demonstrate a financial need? If so, you may qualify for a direct subsidized loan or a Perkins loan, which typically offers the perks of low interest rates, not accruing interest while you’re in school, and a variety of repayment options. However, both loans have limits to the amounts you can borrow.

What degree are you pursuing? If you are pursuing a graduate degree, you generally do not qualify for a direct subsidized loan, so if you have limited finances, a Perkins loan may be a consideration. A direct unsubsidized loan is a consideration if you do not qualify for a Perkins loan and may have adverse credit. A graduate student can also get a graduate PLUS loan, which typically has higher borrowing limits (cost of attendance minus any financial aid) but takes your credit under consideration. The loans offer forgiveness programs and a variety of repayment options

How much money is needed to pay for college? Federal loans typically limit the amount you can borrow. Private loans can offer a higher amount, but they generally come with higher interest rates. Evaluate your needs and if possible, tap into the federal loans before getting private loans.

What are your career aspirations? Perkins loans offers a variety of cancellation options, including options for teachers who serve low-income children, certain medical professionals, and even librarians who work in certain schools and libraries.

Student loans can be confusing. Don’t just take the first one offered though. Researching the features can help you make the best decision.

 

How to Pay College Bills Not Covered by Financial Aid

January 18, 2017

Worried about paying college bills? Considering that the average balance in a 529 college savings plan is only $21,000, it’s no surprise that one of the most frequently asked questions we get at Financial Finesse is, “How should I pay for my kids’ college?” Here are some ideas, along with the benefits and pitfalls of each.

529 College Savings Plans

529 plans have become the most popular way for parents to save for future college expenses due to the tax advantages of both tax-free growth (as long as funds are used for qualified expenses) and in some cases, state income tax deductions for contributions.

Pros: They offer tax advantages, ease of saving, and have less of an effect on financial aid than savings in the child’s name.

Cons: They must be used for qualified education expenses to avoid a 10% penalty plus taxation of withdrawals. Funds held in a grandparent’s or other non-parent’s name are treated as income in the year distributed, which can affect future years’ applications for aid.

UTMA/UGMA Custodial Accounts or Other Savings in Your Child’s Name

Any account in your child’s name, even their own savings from summer jobs, will have the greatest impact on the availability of aid. If these assets are intended to be spent on college anyway, consider transferring them into a 529 plan to reduce the impact. Otherwise, spend what you’re going to spend from these accounts first to lower that impact.

Pros: Any capital gains from the sale of investments are treated as income to your child instead of you (beware kiddie tax rules though) and funds can also be used for things like a new laptop for school or eventually, your child’s first home or wedding.

Cons: 20% of the value is counted in aid formulas, potentially reducing the amount offered to your child. Once your child reaches the age of majority in the state where they are going to school, they’ll have unfettered access to the funds.

Taxable Investment Accounts

Any investments you own outside of retirement accounts are included in the financial aid formula and should be spent before dipping into retirement savings. If you have to sell investments for a gain, consider gifting them to your child first so that they could potentially pay a lower capital gains rate than you would. Doing this right before your child enters college, but after you’ve counted it as your asset on the FAFSA, nets the best benefit in terms of how it affects financial aid as the income won’t come into play until your child’s junior year package. However, if your investments are at a loss, keep them in your name to reap the benefit of up to $3,000 per year of capital losses.

Pros: There are possible tax benefits but no early withdrawal penalty.

Cons: Taxable gains could affect future aid offerings.

Home Equity

As long as interest rates stay low and you are able to deduct any interest paid on a home equity loan or line of credit, you may consider tapping this source if it’s available rather than having your child take out higher rate student loans. Of course you’ll be on the hook to pay it off even if your kid drops out mid-semester, but that’s a different kind of planning conversation to have with your child.

Pros: They have relatively low interest rates and there’s a potential income tax deduction for interest.

Cons: Your home is now collateral for your child’s education whether they graduate or not.

401(k) Loan

Rather than requesting a hardship withdrawal from your 401(k), which would incur income taxes and possibly an early withdrawal penalty if you’re under age 59 ½, borrowing from your 401(k) may be an option worth considering.

Pros: There’s no credit check, you pay yourself back the interest, and they generally have lower interest rates than student loans.

Cons: Your plan most likely limits the amount you can borrow to the lesser of $50,000 or 50% of your vested account value and you typically have to pay it back in 5 years or less. If you leave your job, you may also be on the hook for any balance due or risk negative tax consequences.

IRAs

Traditional and Roth IRAs allow penalty-free early withdrawals for qualified education expenses, although you’d still have to pay taxes on any traditional IRA withdrawals and any growth in your Roth IRA.

Pros: You don’t have to pay it back and there are no penalties for early withdrawal. Roth IRAs also let you withdraw up to the total amount of contributions without any tax consequences, so you could leave any growth in the account to continue growing for your retirement.

Cons: You can’t pay the money back as you’re still limited to annual contribution limits and most likely, you will have to pay income taxes on withdrawals unless you’re just using your Roth IRA contributions.

Student Loans

At the end of the day, you may need to ask yourself if you should even be contributing much at all, particularly if doing so would compromise your ability to retire at a reasonable age. As our CEO Liz Davidson likes to say, they don’t give out loans for retirement and you can’t “work through” it either. I also like to remind parents that sacrificing retirement so that your child can graduate debt-free may be a great way to negate the possibility that they’ll end up back at home sleeping on your couch, but it could mean that one day you’ll find yourself sleeping on THEIR couch.

Student loans are there for a reason (and no, they’re not “financial aid,”) and have provisions in place to account for the fact that your child may not be earning a ton of money right out of school or they may face difficulty in finding a job after graduation. Help your child reduce these chances by helping them choose a lucrative major. Then consider this college funding plan that many of my friends are choosing for their own children: they plan to fund about half of their kids’ educations on a semester-by-semester basis and expect their child to fund the other half either through working, loans, work-study programs or whatever means work for their student. This method worked to keep them motivated to do well and graduate on time and the hope is that it will serve the same purpose for their children.

 

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5 Places to Look for Scholarships and Grants

December 29, 2016

It’s that time of year when students are hearing from colleges and having to make decisions of where to go and how to pay those college bills. When it comes to reducing college costs, there are many options, but none come with the benefits that scholarships and grants have. Unlike loans, they don’t have to be paid back and unlike work study, they don’t have to be worked for. They’re basically free money. Here are some places to find them:

1) The high school guidance counselor. If your child hasn’t spoken to their guidance counselor yet, this is a great place to start. After all, it’s part of their job. They’re often notified of scholarship opportunities and can at least point your child in the right direction. In fact, I found out about the scholarship offered by my college from my high school guidance counselor.

2) Employers. Some employers offer scholarships to employees and their children. Ask your employer, your spouse’s employer, and your child’s employer about any possible programs. Even a part-time or summer job may qualify.

3) Community organizations. Many local community organizations may award scholarships to local students, especially if your child has performed community service or if either of you are members. These scholarships tend to be small, but there’s less competition for them. I remember winning a small scholarship in an essay contest by my local bar association. You can find a list of some community service programs here.

4) National scholarships. There are literally thousands of opportunities to win scholarship money out there based on your child’s ethnicity, religion, interests, academic and athletic achievements, essay-writing ability, and other skills and attributes. You don’t have to pay a scholarship search service to find them though. This article compares some of the top free online scholarship search engines.

5) The college. Finally, there’s the actual college your child applies to. They generally offer scholarships and grants based on both need and merit. While your child may not know what merit scholarships they’ll qualify for until they apply, you can estimate the need-based grants by using the net price calculator tool that each school has on their web site. In calculating your expected out-of-pocket costs, they estimate how much your child would receive based on family income, assets, number of children in college, etc.

While your child may not be able to get enough scholarships and grants to cover all of their costs, you may be surprised by what they can qualify for. All it takes is a little research and legwork. If nothing else, it will be good preparation for the work they’ll have to do in school and the rest of their lives.