College planning can be confusing and overwhelming. Here we tackle the top 6 considerations for college planning that can be applied to kids at various ages and grade levels.
- Preparing Kids For College
- Saving For College
- Scholarships & Grants!
- Paying For College
- Tax Breaks For Higher Education
- Preparing Kids For Life After College
1. Preparing Kids For College
- Sit kids down and discuss the high cost of college. This will only make your child more appreciative of his college experience and make it easier for them to help with its cost.
- Kids should be involved in the process of saving for college. This will give them skin in the game and reinforce of the gravity of the costs involved.
- Research scholarships as soon as they hit high school. It’s not too early to have kids begin the process of strategizing on how they will win scholarships for college.
- Teach them student loans are a last resort. Walk through the many alternative ways to pay for college, including scholarships, in-state tuition, community college & transfer, cheaper college & transfer and working part-time.
2. Saving For College
- 529 Plans are state sponsored and take the form of a prepaid tuition plan or a savings plan.
- Saving is almost always better than Prepaying. Prepaying eliminates all of the positive benefits of kids co-paying and can be problematic if they decide to go to an out of state school.
- 529 Savings Plans have no annual contribution limit, accumulate and withdrawal tax-free when used for qualified college expenses. The savings can be used at any university in the U.S.
- Coverdell Education Savings Accounts (ESA) can be opened with an investment firm. They have a $2,000 annual contribution max, but also accumulate and withdrawal tax-free when used for qualified college expenses.
- IRAs & Roths can be used for college, but should only be considered after completing a financial plan. The early withdrawal penalty of 10% is waived if the money is used for qualified education expenses.
- Taxable Investment Accounts don’t offer college specific tax advantages, but do offer flexibility, as earnings can be taken at anytime and potentially enjoy long-term capital gains rates.
3. Scholarships & Grants!
- Start researching scholarships during the first year of high school. Don’t Wait!
- Apply for big and small scholarships. The broader the scholarship, the more competition, so be sure to apply for narrow focus scholarships as well.
- Use online scholarship services like Cappex, CareerOneStop, the College Board, Fastweb, Scholarships.com and Scholly.com.
Target merit based scholarships. Colleges are a huge provider of scholarships and will give them for things like GPA, field of study, or where you grew up.
Apply for Scholarships even AFTER freshman year in college. Your child should be applying and checking with their financial aid office for scholarships every year.
- Federal Pell Grants tend to go to students with major financial need. The Simple Dollar offers a great resource for single parents.
- Federal Supplemental Educational Opportunity Grants (FSEOG) are administered directly by the financial aid office at each participating school and not all schools participate.
4. Paying For College
- Ideally, pay for college with savings accumulated, but it’s also understandable that this is not an option for many. With the high cost of college, paying as you go is also likely unattainable.
- Paying for college with a 401k loan or home equity line of credit, should only be an option after a thorough financial plan has been completed and determined it will not disrupt your path to retirement. Remember, kids have a lifetime to pay off student loans, there’s no loan for retirement.
- In most cases, maximize federal loans before taking out private loans. Utilize the consumer financial protection bureau’s comparison shopping tool.
- Before applying for student loans, fill out the Free Application for Federal Student Aid or FAFSA form.
- Federal Direct Subsidized Loans do not accrue interest while the student is in school, or when loans are deferred after graduation. Eligibility is based on financial need and the amount students can borrow can be limited.
- Federal Direct Unsubsidized Loans are not based on financial need, but students are responsible for interest even while you’re in school or while your loans are in deferment after graduation. Any unpaid interest is added to your loan balance.
- Federal Plus Loans are used to pay education expenses not covered by other financial aid and you must not have adverse credit history.
- Private Student Loans vary widely in interest rates and terms, so use student loan comparison tools to see what’s best for you.
5. Tax Breaks For Higher Education (Check with your CPA before acting)
- Student Loan Interest can be deducted by up to $2500, depending on your income. To determine your deduction, use the IRS’s Student Loan Interest Deduction tool.
- College Tuition has two tax credits available. Choose between the American Opportunity Credit or the Lifetime Learning Credit, per qualifying student based on which is more beneficial.
- The American Opportunity Tax Credit is only available for four years of education and worth up to $2,500 for individuals with an AGI below $80k or married couples filing joint with an AGI less than $160k.
- The Lifetime Learning Tax Credit has no limit on the number of years you can qualify, but is only worth up to $2,000 for individuals with an AGI below $66k or married couples filing joint with an AGI less than $132k.
- The Tuition and Fees Deduction is up to $4,000 depending on your income and can only be taken if you don’t take the American Opportunity Credit or Lifetime Learning Credit
- 529 Plan Contributions are not tax deductible federally, but many states offer full, or partial state tax deductions for contributions.
6. Preparing Kids For Life After College
- Don’t follow your passion. As young people likely don’t know what that is without real world experience. Instead, figure out your interests and align them with problems the market will pay you to solve.
- Guide but don’t lead kids into a job. Allow them some autonomy as they go through the process of discovering what’s right for them.
- Encourage internships early. As this is the best way to gain valuable real world experience.
- Teach them to avoid debt and manage money. This means walking them through opening a bank account and downloading an app for budgeting.
- Understand the first job isn’t the important one as the first postgraduate job typically lasts less than 2 years. Experience and mentorship early on can prove more important than pay.