Twenty years ago, sitting at my computer, my arms resting on my pregnant belly, I opened a PA529 college savings account for my baby girl.
I followed conventional advice: Start investing now to take advantage of compounding interest. Invest in diversified high-yield accounts. Pay myself first. Invest consistently. Automate contributions from payroll. I opened a Upromise credit card for cashback rewards.
All great advice… except why did every parent in my circle run out of money before their baby girls and baby boys finished college? How did our collective estimates fall so short of actuals?
At the risk of aging myself, my parents funded my college using an add-to-anytime CD. Yearly tuition cost less than today’s vacation. Some in my circle funded college out-of-pocket. Paradigms have shifted—hard.
“Many people underestimate long-term inflation and the true cost of room, board, travel and inflation-adjusted tuition,” said Harrisburg-based financial advisor Ray Stark, of Thrivent Choice Financial Group.
Conner Brady, financial planner and owner of Brady Planning, numerically explained how today’s parents get caught unaware. College costs rose 2 to 8% every year, far outpacing wage growth over a 40-year period ending in 2023.
“A low-yield savings account, savings bonds and a part-time job doesn’t cut it anymore,” Brady said.
Invest Is Best
529 plans are a great go-to plan for tax-deferred growth and tax-free withdrawals. You can invite third-party investors, and you can invest in 529 plans for other states, which may have different rules. They typically offer age-based portfolios that automatically adjust risk. As college nears, the portfolio shifts to safer investments to reduce risk and preserve capital. Stark advised that 529 plans do count as an asset, and may reduce your student’s financial aid award. Likewise, custodial accounts count as student assets.
You can also use cash value life insurance or other investment accounts not tied to your student as part of your overall wealth portfolio. For example, you can withdraw contributions against a Roth IRA without taxes and penalties prior to the minimum age when withdrawals are used for qualified higher education expenses. These funds won’t affect your student’s financial aid award.
Real estate is another great long-term investment. Pro tip for those seasoned in real estate investing: Purchase real estate near your student’s college. Your student now has housing, and you can charge their roommates rent.
FAFSA-lutely!
The federal government may give your student financial aid, but they first want to know how much you have. According to Brady, Uncle Sam expects parents to help students financially, whether they plan to or not. For every $100 of parent-owned assets, the government assumes $5.64 goes towards college.
“Don’t assume you make too much money or have too many assets to receive financial assistance,” Stark said.
Enter the Free Application for Federal Student Aid (FAFSA) form. Many high schools and local credit unions offer tutorials for completing it. You can also find handbooks and video tutorials offering strategies for shifting your money around.
“Savings used too early may actually count against students receiving more financial aid during the second half of their education,” Stark said.
Fill out the FAFSA form every year, and don’t miss the application deadline.
Loan Lessons
“We see lots of grads entering the workforce who didn’t understand the long-term impact of the college debt they were signing up for,” Brady said.
Loans represent a great learning opportunity.
“Educating kids about debt early can help prevent costly mistakes later in life,” Stark said. “Discuss interest rates, repayment options and co-signing risks.”
Brady recommends federal loans (preferably subsidized) over private loans. Federal loans offer more flexibility and don’t grow interest until after graduation.
Realistic loan amount? “A loan shouldn’t be more than one-third of the student’s first year of expected income,” Brady said. “More than that is unrealistic, and may not be worth the return on investment.”
Can I Get a Tip?
Here are some bonus ways to save cash and pay for college.
- High schoolers may qualify for college credits through Advanced Placement classes. Many schools also partner with community colleges to offer college courses to high schoolers, who can earn early college credits.
- Save on room and board by attending community college. The first two years of college consist of general education courses that should transfer to almost any four-year college.
- Encourage your high schooler to frequently check with their guidance counselor for grants and scholarship opportunities. If you have a niche talent or sports acumen, enlist a guidance counselor’s help finding a recruiting college.
- Private schools are not always more expensive than state schools. Many offer need-based and merit-based aid.
- Consider joining the military—active duty or reserves. Service members receive college tuition and housing expenses at accredited institutions.
- Check into your current (or potential) workplace’s benefits. Full- and part-time employees may qualify for tuition assistance. University employees and their families often receive reduced or free tuition.
- The ultimate cost avoidance—consider a lucrative trade instead. My stepson didn’t need full college for his field. He attended vo-tech and took some college classes.
- Not every degree is worth taking on significant debt. Consider an associate’s degree or certificate program instead of a four-year investment.
Whether you connect with a financial adviser or DIY with an internet calculator, here’s a disclaimer via both Stark and Brady: No financial advice provides guarantees. Consider investment objectives, risks, charges, tax implications and expenses associated before investing.
Connect with Ray Stark at https://connect.thrivent.com/ray-stark.
Find out more about Brady Planning at www.bradyplanning.com.
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