The money guys at oXYGEn Financial want to help you breathe easier® about your financial future by being your private CFO™. Call our offices for a free visit today at 800-355-9318, and enjoy these money tips around planning for your children’s college education.
1. No Overall Game Plan. Many clients we sit down with have done a realistic plan and projection of what the real cost of college education is going to be for their children. With today’s software, you can actually go college by college (in state vs. out of state) to calculate the cost of a college education. Are you looking at private school? Public school? In state? Out of state? Inflation adjustment? All of these are just a sampling of questions to help you figure out how much it is going to cost for a college education, how much you need to save today, and what after-tax rate of return your money is going to need to earn to help you reach the goals you plan to achieve to give your children financial support. www.savingforcollege.com is just one website to go through this type of exercise.
2. Choosing Right College Savings Account. There are many different vehicles today for saving money for college education. Once you have built an overall game plan within your financial plan, you should have a better idea on exactly which college savings plan makes sense for you. Should you take out the popular college saving plan? Is a good idea a Coverdell IRA? Perhaps taking a look at the notion of doing an UGMA or an UTMA? There are various other methods including Savings Bonds, Roth IRA’s, and Life Insurance. You need to clearly look at the tax ramifications of each plan, cost, investment choices, and more to determine which one is right for you. Making the wrong decision here can be a disastrous mistake.
3. Not Matching Your Investment Goals To Your Time Horizon. Most people we meet for the first time, truly don’t understand the how the money is being invested for your children’s education. More importantly, a big mistake we see is not matching the time frame of those investment strategies to the type of investment account where the money is located. A great example of this is seeing parents whose child is going to college in one year, yet 100% of the money is still invested in the stock market. Many parents felt this pain in 2008, and are now having to experience finding other alternatives on where to come up with money to pay for college. Each year that draws closer, the overall balance of stocks and bonds should become more conservative. If you don’t have an appropriate time frame (recommended at more than 5 years) you may not want to consider being in the stock market with college education money due to the risks involved.
4. Underestimating Inflation of College Tuition. With normal inflation rates historically being in the 3% range, college education costs have been in the 5% to 6% range which is double normal inflation. At 6% inflation, this means the cost of college will literally double every 12 years. This is where parents may want to consider plans such as Prepaid Tuition Plans or other vehicles that may keep pace with rising inflation. You need to consider carefully the pros and cons of these plans, but this is a major miscalculation when most parents do goal setting for saving for their kids’ education.
5. Using Your Retirement Account To Pay For College. This is up at the top of the list of the biggest mistakes I see parents make when it comes to paying for college. In general, I believe it is a big mistake to sacrifice your retirement for your kids’ college education. It can become even more of a financial wreck if you get involved in taking loans from your 401k plan or other type (s) of retirement plans. This can cause a major hiccup in the time value of money in your own retirement account, and can be very difficult to recover in the later years of your life.
6. Raising The Expected Family Contribution. With so much hitting a parent’s household around college education, it is important to keep a close eye on the calculations around the expected family contribution. The EFC is really around how much of your income and savings you’ll need to spend before financial aid will kick in for you. Seeing where your income is going to be, how assets are titled, and what other assets you are going to sell are serious considerations around these calculations. Make sure you understand what counts for your name and your kids name when it comes to what assets you will have to use for college.
7. Not Researching Grants, Scholarships, and Loans. You don’t have to have a 4.0 GPA or be a star athlete to qualify for free money! Scholarships are based on a variety of criteria and can be found on the Internet, in scholarship guides, and through sponsoring groups. I have found that some of these scholarships can be of the most obscure nature. Stay organized during your scholarship search by keeping a list with deadlines and requirements. Make sure you research all avenues from all areas that touch your life. If you can’t apply online, be sure to leave enough time to request, complete, and mail a hard copy. Try www.college-scholarships.com for a good starting point. Use your local schools and libraries for resources.
8. Not Managing The Cost Of Investing. This mistake is true of all of your investing decisions. However, because the time frame you have to save for college education is often shorter than the one you have for retirement, you need to watch your costs even closer. When you choose investments for college education, make sure you analyze all the costs that you may not see in an investment including trading costs, management fees, 12b-1 expenses, operating expenses, and custodial fees. Especially when it comes to college saving plans, you can find out what the fees of the overall plan are which may help you make a decision on whether the in state plan makes the most sense, the out of state plan, or using an independent plan. It is a good idea to talk to a financial advisor or a CPA before making the final college decision. A 1% saving in cost over an 18 year time frame can make a dramatic difference in the amount you have to save.
9. File FAFSA Annually In January And Research Your Ability For Federal And State Aid. Two-thirds of all full-time undergraduate students receive some kind of financial aid, so odds are you are eligible, too. The federal government has a formula that determines the amount your family is expected to contribute to your college costs. Any costs above that have a chance to be covered by financial aid. The Free Application for Federal Student Aid, or FAFSA, is required to be considered for federal student aid. It can also be required by colleges, state agencies, and some scholarships. Complete the FAFSA for the first time as early as you can during the spring semester of your senior year of high school and every year thereafter that you are in college. The new FAFSA form is updated and available each year in January, and the sooner you apply, the better your chances are to receive the maximum amount of financial aid for which you are eligible. Go to www.fafsa.ed.gov for more information. (from the Sallie Mae website)
10. Not Setting Realistic Expectations With Your Kids. No matter which path you set out with your kids around college, be realistic about what is affordable in your family budget. You should also be clear around things such as whether they will have to get a job while going to school, what you can afford if anything around spending money at school, and what your household can afford overall. While a 4 year private school may be the dream school for your child, the cost of a 4 year public school may be what your house can afford. Make sure they know what you can realistically help them out with so they can plan their future for the next four years. The more clear you set expectations, the better the journey will be in college.
If you’d like to talk to us about college education planning or overall financial planning, please contact oXYGen Financial at 800-355-9318 or visit us at www.oxygenfinancial.net
The views expressed above should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its accuracy.
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