Spring brings warm weather, flowers, as well as the potential for “emotional showers” as many families are racking their brains to figure out how they will pay for their child’s college tuition. The best solution is understanding the 5 components of a college funding plan.
Are you in planning mode or paying mode?
To build a smart college funding plan, you should begin the planning process before selecting schools. Given the average cost of a public college is $25,673 and $54,298 for private, families need to understand the varying costs before sending in applications. Many people do not take the time to educate themselves about the price, and do not realize how expensive college is until they are hit with the first bill.
In their defense, no one forecasted the cost of college would increase by 510% over the last 10 years, so people shouldn’t feel bad. Families need to learn the art of planning and the proper strategies to pay the bill down to the last dollar for all four years.
We plan in the Fall and build the plan to pay in the Spring
The most common question about paying the bill revolves around a financial product (the 529 account) and not about financial strategies. The financial services industry has done a great job into convincing us into thinking a product is a solution. But is the 529 the best tool to pay the bill?
As someone who has witnessed the evolution of the 529 account, I cannot recommend using it 100 percent of the time. Like any financial product, there are benefits and limitations to its use. It is not a perfect tool for everyone.
Most people view the 529 account as a college funding strategy, but it is simply a financial product with benefits and limitations. I’ve seen the first hand impacts of said limitations in the form of higher costs for tuition.
Many families, college counselors and financial advisors need to be educated on the 12 to 15 strategies used to fund college. The financial services industry has been trained that a 529 is the best and only tool for college funding, but it is not a one size fits all decision.
Anyone who tells you a 529 account is bad – or great – isn’t providing the full story.
At the very least, they do not fully understand on how to save on the cost of college, financial planning for college or financial aid.
You see, a 529 plan can be a great tool based on a family’s overall college funding strategy. In fact, I opened up a 529 account a few weeks ago when my second son was born. On the other hand, a 529 may be something that could negatively impact your ability to receive and maximize aid. Additionally, it can create unintended tax consequences when overfunding or provided with large scholarships.
Rather than focus on a financial product, families should look at five core components before discussing and implementing strategies with financial tools. It is critical to understand how these components can help lower costs and give you peace of mind.
The five core components of a great college funding plan:
-
Resource identification
- What funds are available to pay the college bill?
- Are there additional funds I can access (loans, scholarships, tax credits)?
- How do these resources impact my ability to receive merit money and/or financial aid?
- Do I have a four-year funding plan that accounts for every dollar of the college costs?
-
Timing
- Depending on resources, are they keeping up with college inflation?
- When is the best time to use these funds? Certain accounts, scholarships and loans are better used at different times.
- What is the impact on my ability to receive merit money and financial aid in the future?
-
Accountability
- Does my student have “skin in the game” or do they expect me (the parent) to pay for college?
- Does my student understand the cost of attending college or university?
-
Funding
- Analyze the four-year costs of each college my student is applying to in the fall and compare them.
- Have you mapped out your actual four-year blueprint with which funds, tax scholarships and resources you will use?
- Did you stress test my current plans?
- Is my allocation right given market conditions and my student’s college time horizon
- Will we use loans? What are our best borrowing options?
-
Tax Planning
- Am I eligible for the American Opportunity Tax Credit? If yes, how do I maximize it?
- Am I getting tax planning or really just tax prep? If no – you might be missing tax scholarship opportunities.
- If I am a business owner, can I hire my student and make them tax independent (not college student independent)?
- Do I understand the 2018 taxes changes and how we might benefit?
Focusing on these categories should be the starting point of your college funding plan. Once understood, you can move on to building strategies that will lower the overall cost and/or provide the best plan to fund the college bills.
So what should you do now?
If you want ideas on funding college or planning for the price of college, please feel free to Schedule a Free 30 Minute Call or download our complimentary guide: A New Approach to Paying for College.
