The recipe for success in affording college education is simply proper planning. Unfortunately, many families wait too long to start preparing for this major cost. By delaying, they are missing out on years of savings and the magic of compounded returns. Additionally, most folks don’t consider all their available options for making college tuition less of a financial burden. It’s generally useful to take a multi-pronged approach to college planning. Below are some considerations to determine the best way to finance your child’s higher education.
Utilize a 529 college savings account: 529s are the best method to save for higher education for most families. They are easy to set up, flexible in how they can be used, and tax efficient. A parent can set one up for a child, a grandparent can use it for a grandchild, and the beneficiary can be changed to a qualifying family member of the current beneficiary at any time without tax consequences.
Contributions to 529 accounts are made on an after-tax basis. Those funds are invested and grow over time on a tax-deferred basis. The money can be withdrawn tax-free if it is used to pay for qualified higher education expenses.
529s are state specific, so certain states may have additional benefits for instate residents. For example, a New York State taxpayer with a New York 529 plan may be able to deduct up to $5,000, or $10,000 if married filing jointly, of their contributions on their state income taxes. Every state has different benefits, some have none at all, so it’s important to determine which plan makes the most sense for your situation.
Fill out a FAFSA®: In order to apply for federal student aid, such as federal grants, work-study, and loans, you need to complete the Free Application for Federal Student Aid (FAFSA®). Completing and submitting the FAFSA is free and simple. It gives the applicant access to the largest source of financial aid to pay for college or career school. Additionally, many states and colleges use your FAFSA information to determine eligibility for state and school aid. Similarly, some private financial aid providers use FAFSA information to determine qualifying candidates.
Any college-bound person should fill out the FAFSA a year prior to matriculation. Remember, your family doesn’t need to have a low income to qualify for assistance. Even if your family makes $200,000 a year, you could be eligible for aid. You also automatically qualify for a low-interest federal loan by submitting a FAFSA. These loans are less expensive to repay than many private student loans. Furthermore, many work-study programs and even some merit-based scholarships require the FAFSA to help them determine award amounts. Each year federal aid is left on the table by students who didn’t file a FAFSA.
Evaluate university options by cost: While this may be frowned upon by college guidance departments around the country, evaluating college by expense is a sensible approach. The difference in costs between private and public universities is significant. Furthermore, there may be a significant cost disparity between going to an in-state school versus going out of state. In many scenarios, there isn’t any real value to going to a private or out of state university. Staying local, and cost conscious, in those situations is a wise decision.
Students who want to graduate from a big-name private university can strategically save a meaningful sum of money with creative planning. One strategy is to start their coursework at a local community college and then transfer to the more expensive school at a later date. This will allow the student to graduate from the university of their choice while not needing to spend as much to attend all four years. Naturally, it’s important for the student to review the university’s requirements for minimum time spent on campus to earn a degree.
Cash flows: Many frum families have managed their budgets for years to pay for yeshiva elementary and high school. Continuing the same financial outlay for another four years may make a lot of sense. That cash flow can help supplement scholarship funds, financial aid, and the savings in a 529 account to make college less financially burdensome.
Prioritizing your financial goals: When considering methods to pay for your children’s college education, it’s imperative to evaluate how it ranks relative to your other financial goals. I personally believe that paying for college should rank below saving for retirement. Your child will have options when it comes time for college. Between loans, scholarships and more reasonably priced universities, there are a myriad of possibilities for affording higher education. However, if you can’t afford to retire, your options will be much more limited. You may need to continue working much longer than planned. If continuing to work is not possible, you may need to rely on the generosity of others to make ends meet. All things considered, “paying yourself first” in the form of retirement savings should take priority over saving for college.
Too often, parents assume that a 529 account is the sole vehicle to finance their child’s higher education costs. In reality, a proper plan will utilize a multi-pronged approach that considers all potential college financing options. Doing so will allow your family to make realistic plans for affording college that won’t derail you from achieving your other financial goals.
Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.