Finance for the Family 101

College has never been an inexpensive investment. A child wanting to attend college did so with the help and support of parents who understood that success in life was greatly enhanced by the learning experience that college offered.
Finance for the Family 101

Studies have always shown that the earning potential of someone with a degree was exponentially greater than that of someone who had only graduated with college. However, in today's marketplace, the cost of attending a public four-year institution is skyrocketing at such a rate, without careful planning a student will graduate with a diploma and a mountain of debt to go along with it.

Most parents understand the delicate balance between saving for their retirement and paying for their children's college education. Of course, a child can take out a loan to attend school. There are no such loan's to fund living in your seventies and eighties. With that being said, many parents feel that paying for college is just as much a part of being a parent as anything else they've spent money on the first eighteen years of their child's life.

With today's tuition prices rising faster than inflation and most parent's salaries, parents must become aggressive if they want to avoid feeling the so-called college crunch when their kids begin school. The college crunch is the stress associated with having to fit college bills into an already over-stretched budget. Something in the budget is going to get squeezed. And other things will feel the crunch under the weight of the importance we put on attending college.

But it does not have to be this way. If parents start early and get a jump on tuition, they can avert the stress that has raised the blood pressure of devoted parents who want nothing but the best for their kids, even if at their own expense. For example, if a parent begins investing $100/month when their child is born and they receive an eight percent return annually, when their child is ready to attend college that investment will be worth $48,000. Will that alone pay for college in 2025? Probably not, but every plan begins with a start.

Today's new parents face costs that could run upwards of $200,000 in eighteen years. In order to make a dent in that expense, parents need a balanced approach to saving for college. That approach has to begin with a 529 plan. A 529 plan is a way for parents to either prepay or save for college based on each individual state. With the prepay versions, parents can purchase tuition credits at today's rates that can be used to pay for college at a later date. The savings plan functions like a mutual fund in that all growth in the plan is based on market performance. One of the benefits of the savings plan is that the level of aggressiveness is tempered by age. As the child approaches college age, the plan gets more conservative, lowering the risk of the investment. With the 529 plan, qualified withdrawals are free of federal tax. Parents are able to save between $100,000-$270,000 per child and there are no income or age restrictions on the plans.

The second thing parents need to focus on is portfolio allocation in their investment vehicles. With stocks being the best long-term performers for college savings portfolios, parents need to know how to weight their portfolios based on where their kids are in relation to attending college. If a child is eight or younger, 60-95% of the portfolio needs to be in stocks. Between the ages of nine and thirteen, parents should maintain the existing portfolio without any changes. But with all new contributions, those should be placed in bonds for risk aversion. At the age of fourteen, parents should shelter their returns, moving equity assets to money market accounts or short-term bonds.

Beyond investing, parents must look at other ways to pay for college. In 2013-2014 over $122 billion was given out in financial aid to families for college. There are several factors for an aid package. Parent's income, non-retirement assets, dependents, and the income and assets of dependents are used to calculate the expected contribution of family's to the education of a child.

The first type of aid is grants/scholarships. What is great about these is that they do not have to be paid back. There are two types of grants, Pell and Supplemental. With the Pell Grant, college students from a lower income bracket can receive a maximum of $4,050. With the Supplemental Educational Opportunity Grant (SEO), these grants-in-aid are administered by the colleges. Students are able to receive $4,000/annually.

Many parents will not want to hear this but loans are an obvious way to pay for college. They are based on need and non-need. Loans represent over 56% of all aid given out over the last three years. There are three major types of loans, Perkins, Stafford, and PLUS.

The Perkins Loan is made directly to students. The payments begin nine months after the student's last college class, whether it is because of graduation, school withdrawal, or some extraordinary circumstance. These loans usually carry an interest rate of five percent. But interest does not begin to accrue until the loan has entered repayment.

The Stafford Loan is similar to the Perkins. It too is made to students. The repayment guidelines differ in that repayment begins six months after last class attended. Its interest rate is less favorable than the Perkins, sitting at 8.25%. Undergraduate freshmen are able to request up to $2,625 yearly while seniors are able to ask for $6,500.

The PLUS or Parent Loans for Undergraduate Students is a loan made directly to the parents. They can borrow the entire cost of attending college. The loan is dependent on a credit rating. Though the banks are not as tight on PLUS applicants as they are in mortgages. The interest rates of the PLUS loans begin immediately and repayment begins sixty days after the loan monies are received.

There are additional methods like securing a line of credit, home equity, Signature Student loans, and unsubsidized Stafford loans. The last option or piece of the saving for college puzzle is the Hope Credit or the Lifetime Learning Credit. The Hope Credit is a dollar for dollar reduction on taxes owed. The income level must be lower than $50,000 for a single person and $100,000 for a couple. The Hope Credit offers to lower your taxes by up to $1,300/child while the Lifetime Learning Credit lowers taxes by $2,000.

The harsh reality is that many children will not have the gift of having a parent that is able to pay for college out of pocket. So, for kids to go, parents and students must come together and pursue every opportunity to apply for scholarships and grants and take out a loan for whatever is remaining in order to attend school. If a kid is smart enough to go to college there should be no reason why every stone is not turned over in order for them to go. Every stone includes loans, scholarships, and grants.

College is an investment. Is your child worth the risk?

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