Happy First Day Back to School!
With market instability serving as a backdrop to the return to school, there’s a very good chance that you’re in a ‘code yellow’ state of emergency today, extremely anxious about how the heck you’re going to be able to save and pay for college. Hopefully this piece, which describes the top five mistakes to avoid when figuring out how to save and pay for college in this economy, will show you that you can still afford a great college education without sacrificing your future, raiding what’s left of your retirement, or taking on crippling debt.
Mistake # 1: Stashing Money in Your Child’s Name Many families are advised by CPAs and other trusted tax planning professionals to put some or all of their assets in their child’s name. While well-intended for tax purposes, assets held in your child’s name, like in an UTMA or UGMA account, will hurt and even potentially destroy outright any chance you have of qualifying for free need-based (and merit) aid through the Federal, State and Institutional systems. Besides, upon turning 18, students will have full access to any funds in their UTMA or UGMA account – without any oversight from you.
Mistake # 2: Risking Too Much in a 529 plan We’re not saying to go and cash out what’s left of your 529 plan, but before you continue to reflexively fund it, you should know that it’s not your only college savings option and it certainly may not be your best one in this economy. 529s offer some tax benefits, liquidity (for educational purposes only) and the lure of higher returns (they are heavily invested in equities). But in a volatile market, the risks and downsides – including financial aid penalties, few guarantees, high fees and a lack of flexibility — can be the exact wrong place to put most of your college savings.
Mistake # 3: Counting on the Florida Pre-Paid Plan
I know that in uncertain times, nothing looks better than certainty. The problem with ‘sure things’ is that they are rarely as advertised. Take the popular Florida Pre-paid Tuition plan. Just a few months ago The Miami Herald and Sun-Sentinel ran stories about a proposal in the FL Senate to suspend the program. While this proposal is still far from becoming law, it does indicate the dire financial straits in which the State finds itself. The concern from Sen. Evelyn Lynn (R-Ormond Beach) was that, with state tuition increases of 15% per year, the FL Prepaid Program will not have the earnings to keep up with such tuition hikes given the volatility in the stock market. And frankly that’s only one part of the problem. The other is that FL Prepaid actually only covers a small fraction of the total cost anyway AND it certainly does not guarantee your student will be admitted to a Florida school.
The current FL school costs, on average, $20,000 per year. That includes tuition, room, board, books, fees, travel money, personal expenses, etc. The typical FL Prepaid Plan provides about $3,000 – $4,000 per year. That leaves you with about 15-Large left over to pay for one year at a State U. So, before locking yourself into any pre-paid education plan, you should consider other low-risk investments that offer more liquidity and reward you with consistent growth and protection of your money in all market conditions.
Mistake # 4: Using or Planning to Use Your Retirement Account For College This one is pretty clear-cut. Yes, it is true that current rules allow you to make withdrawals from retirement accounts without penalty to pay for unmet college expenses. However, by doing so, you not only potentially impact your future, you also create a present day income event that is subject to taxes. An IRA or 401(k) distribution will be counted as an includable ‘parent resource’ that may be subtracted from the amount of grant money you are eligible to receive from the government or the Institution.
Mistake # 5: Not Checking Your Work Unfortunately. The first (and last) time most of the families we see have checked in on their college savings plan was when their child was a toddler. A quarterly, semi-annual, or at a minimum – annual, look at how your college savings plan is performing is a good idea in any economy, but an absolute no-brainer today. The time to make sure your money for college is being kept in the right places is NOW! There’s no ‘magic bullet’, but the earlier you plan, the more options you will have. If you haven’t looked to see whether you’re making progress with your plan, or even worse, haven’t been asked by your advisor about the need to make adjustments in this economy, you may be cheating yourself and your children out of thousands of dollars. A qualified and experienced college funding consultant can help you arrange assets in a way that makes sense for financial aid and financial planning purposes. To learn whether you qualify for a Free College Planning Audit, please call Jill at 954-659-1234. Or, to register for one of our upcoming Free Late-Stage & Emergency Financial Aid Community Workshops (appropriate for parents of college-bound High School Students), please visit www.EmergencyFinancialAid.com.
