Developing a plan to pay for college is not getting any easier and with the total costs of some colleges expected to exceed $80,000 a year for 2023-2024, choosing the right strategy to fund college expenses can have a significant long-term impact on both the parent and the student. From student loans and financial aid to 529 college savings plans and home equity, there are many ways that parents attempt to pay for college.
Unfortunately, the complexities of the process can sometimes lead parents and students down the wrong path, with lasting financial consequences — significant debt. In fact, total student debt in the United States exceeds outstanding credit-card debt by a whopping $700 billion dollars. Why so much debt? First, tuition expenses have jumped each year at a rate that was previously greater than the rate of inflation, and scholarships and grants have not kept up with overall college costs.
While the job market has been strong, some students have trouble finding positions in their field and some choose to continue to graduate school. This has made it more difficult than ever for the student to finish college without putting both the parents and the child in a deep financial hole. As a result, many Americans should consider implementing cost-cutting measures and a practical approach to college spending.
What is your return on investment?
While investing in your personal development can be life changing, it can be helpful to view college expenses in the same way you might view an investment. For example, let’s assume that you can choose two different businesses to purchase. The first business requires an initial investment of $250,000 and is expected to generate yearly cash flow of $70,000 a year. The second business is also expected to generate $70,000 a year in cash flow, but only costs $125,000. Which would you choose to invest in? The fact is that there are many institutions that provide high quality education for half the cost of more expensive counterparts. Students and parents need to be practical with their choices and consider choosing a college that also matches their budget and the student’s future income prospects.
It is also important to understand the role of grants and subsidized loans. According to the Department of Education, the federal government awarded more than $120 billion in grants, work-study funds and low-interest loans last year to help students afford college. Loans are generally divided into types — Federal student loans, including Subsidized and Unsubsidized loans to help students and parent loans, including Federal Parent Plus loans and private loans. Since Federal student loans generally charge lower interest rates, they should be considered first. Consider visiting www.collegeboard.com for more information about the varieties of loans.
Understanding the Net Price for college
In addition to loans, more than $3 billion in scholarship money is available for students. While it’s no easy task, families who are willing to put in the effort may be rewarded with additional subsidies. Always start by speaking with the admissions office of the school you are considering and then review sites like www.fastweb.com that provide a database of scholarship information.
Also keep in mind that there are often big differences between the “sticker price” of an institution and the Net Price paid by parents and students. In fact, this number can vary greatly due to various forms of financial aid and scholarships. Consider visiting www.collegeraptor.com for links to institutions and their Net Price Calculators. This site can also help students to choose their major and career and find scholarships.
Consider a 529 Plan
For parents who still have time to save, a 529 plan can be one of the most effective tools for college funding. The plan allows savers to put away funds that may grow federally tax-free as long as they are used for qualified education expenses or private K-12 schooling. Each state has its own plan, and many offer additional incentives for saving. Keep in mind that a 10 percent penalty and income tax on the gains can apply to unused balances. However, a new rule may allow for up to $35,000 of unused 529 assets to be transferred to a Roth IRA for each named 529 plan account beneficiary.
Keep in mind that 529 plans are considered an asset of the parent for financial aid purposes. Consider speaking to your tax adviser and visit www.savingforcollege.com for a comparison of plans and details on the features, benefits and investment options.
While many parents feel it is their duty to pay for their children’s college experience, it is critical for parents to avoid compromising their own retirement in the process. The reality is that the student has many more years of earning potential ahead than the parents do.
Liquidating retirement accounts like 401(k) plans or withdrawing significant home equity can be a dangerous approach, especially with elevated interest rates. Before choosing to make irreversible decisions, parents should understand the long-term effects of their choices. Since everyone’s situation is unique, consider speaking to your financial and tax advisers to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.
