Thursday, February 21, 2013

College Savings Tips

While many of our readers are students, tips on how to save/pay for college are the keys to one's financial success.  I have been known to say that the most important asset in everyone's portfolio is one's self, for it is one's self who works to earn the income it takes to have a fruitful financial plan.  It is well documented that education is highly correlated with earnings and, thus, understanding how to save for the investments we make in ourselves, or our loved ones, is essential to total portfolio management.  Besides, for our younger readers, it is important to consider the costs of a child, before you decide you want to have one.   


Saving for college is overwhelming for many, the realization that one's children or loved ones cannot succeed in college due to financial constraints can be quite depressing.  Yes, the loved one can and, perhaps, should work to help pay for college.  When average costs for tuition and fees, room, board, books, supplies, personal expenses, and transportation are included, it is estimated by the Scholarship Workshop to annually cost $27,210, at a public, in-state university, and $58,640, at a private university, for academic year 2013-14.  This high price tag makes working to cover the entire cost of a higher education difficult.  As a result, many choose the expensive alternative of student loans.  Loans can help and much has been written about their use and misuse in the education marketplace, however, that is not the focus of a tip on college savings.   So, let's build some education capital!


The most important thing you can do for your child, beginning prior to conception, is to create a healthy environment in which to rear the child.  Good nutrition and exercise is important for the mother, as it will be for her progeny.  Importantly, work with the child to develop a love of learning.  Read to the child, prior to their entering school, in an effort to put them at or above their grade-level.  Academic success is the easiest way to receive financial help for university attendance.


If you intend to help the child with their college expenses, begin shortly after they are born, in order to have the benefit of time and compounding on your savings.  Start small with what you can manage or do a finely-tuned calculation utilizing an expected future cost of four years of college and what it would take on a periodic deposit to help reach the goal, at an assumed rate of return and time period.  Do NOT sacrifice your retirement savings for your child's college expenses.  You need to be on track for saving for your retirement.  Your child is not your retirement plan and they can always borrow the money they need, if they have no other option. 


There are several ways to save for college. 

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*       * State-sponsored 529 plans are very popular as they offer federal and, sometimes, state tax benefits.  These include tax-free withdrawals for qualified educational expenditures.  Missouri's 529 plan is called the MOST plan and more about it can be found here: https://missourimost.s.upromise.com/ .  Besides being tax-free, other tax advantages include:

    • Investment earnings grow tax-deferred.
    • While your contributions are not tax deductible on your federal taxes, they are likely deductible at the state level.
    • If you make non-qualified withdrawals, both taxes and penalties will be charged.
    • Should a child not use their entire 529 account, a tax-free transfer of the account can be made to a sibling, cousin or another family member. If this person uses the money for qualified education expenses, the withdrawals are tax free.

·        * Gift money to the child.  Money gifted to the child is counted more heavily against their eligibility for financial aid, if one might qualify for financial aid.  These periodic gifts, under the control of the parent, are a great way to save and to visibly state that you believe in your child's future and are willing to put your money where your mouth is – toward their future.

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           * Life insurance may have a cash value which can accumulate through premium payments and can be borrowed from the policy later, in order to be used for college expenses.  These withdrawals do not need to be repaid, as they will simply reduce the death benefits to your beneficiaries, should the inevitable occur sooner than planned.  Before you choose this option, make sure you need the life insurance and, if you do, that you have enough life insurance.  It is often the case that savings-type life insurance policies are too costly for many young families to purchase and to still provide adequate life insurance coverage.  Buying term life insurance and saving the difference in premiums is still a very effective plan.

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           * Accumulate equity in your home and then refinance, through a home-equity loan or a new first mortgage, to provide liquidity to meet college obligations.  Accumulating more debt, as one gets older, is not the best way for parents to get ready for retirement.  Moreover, this debt is the parents' debt, not the debt of the child.  The investment, however, is being made in the child and the child will be the one who primarily benefits from the investment. I'd let my child borrow the money.  If I want to help, I'll send her a check.


Regardless of your plan, make sure your asset mix is appropriate.  Take greater risks when the child is young by utilizing more equity investments and, perhaps, riskier equity investments.  As the child approaches college, reduce the risks by reallocating to relatively more cash and bonds.  If you have trouble managing your investments, invest in one or more age-based college savings plans.  Most 529 plans have this option, as well as many mutual fund companies have target date funds.  Whatever your chosen investment vehicle, keep the costs of your investments low.  Make sure you remain well-diversified across asset categories, as well as within categories and don't panic with market fluctuations.  Fluctuations are a fact of life and, unfortunately, the biggest losers are those who take their money out, when they can't stand the declining market anymore, and those who put it in, after the market has already appreciated.  Buying high and selling low is not the way to invest.  


One last comment.  If you have a child and want to save money for his education, please begin today.  It is easier to stick to a plan than it is to start a plan.  So, get started.



1 comment:

Thomas Watson said...

Financial planning is really the key.