College Savings: Think Beyond the 529
By Patricia Green
Tracy Green, Vice President and Wealth Management Support Consultant in Innovation & Strategy for Wells Fargo Advisors, has known parents who are so concerned about the rapidly escalating cost of college they begin saving before they even have children.
She advises waiting until the child is born, because a Social Security number is required for most education savings vehicles. But she says the effort is a good start, as it’s important to start saving as early as possible because it’s one of the largest expenses many parents will face.
With so much at stake, what’s the best way to work toward your goal of providing a child with the chance to go to college without taking on large amounts of student loan debt? Green and Rick Ross, co-founder of College Financing Group, LLC, discuss savings options — and some other important items to consider.
Setting Goals and Getting Started
Ross suggests families invest an amount that fits within their budget starting when children are young. Then try to increase quarterly deposits into the college savings account as college nears.
Green says it makes sense to run a college cost projection — for private or public schools — to get a better grasp on what your goal might be. This can provide a guideline for either the total or monthly savings you would need. Such projections are available through your Financial Advisor or online at wellsfargoadvisors.com.
Investing in a 529 college savings plan is a popular way to save for college, because the funds grow tax-deferred and distributions may be non-taxable if used for qualified education expenses. It’s one of the few education savings vehicles where you have the potential for tax-deferred growth, Green says. The downside, says Ross, is that, because it’s an investment fund, there is a chance of seeing negative returns. “It’s an investment, so the best advice is to speak with a qualified investment professional,” he says.
Bridging the Gap
It’s best to avoid using your retirement savings to fund college, recommends Green, even if that means you come up short of your education savings goal. “You can get help paying for a child’s education, but no one will help you pay for retirement,” so exhaust all other options first.
It’s generally difficult to know whether your child will qualify for financial aid, because there are many factors that go into the equation. Green advises applying, no matter how much you earn — especially since the federal program (https://fafsa.ed.gov/) has no cost associated with applying. Filling out the financial aid form is the only way to be considered for federal student aid, which may consist of grants, work-study, or loans.
Both Ross and Green say federal loans provide more flexible repayment options, but private loans may provide better interest rates because they’re often based on a co-signer’s credit score and history. It’s critical to determine whose name the loan will be in. While parents may be able to get a better interest rate because of their credit history, a loan in a parent’s name may not be eligible for forgiveness due to hardship or through incentives such as Peace Corps service.
If the loan is in the student’s name, a good rule of thumb is the total loan shouldn’t exceed his or her expected first-year salary upon graduation, Green says.
Finalizing your package
When thinking about financial aid, it’s also important to look at the schools your child is applying to. Some schools offer merit awards for candidates with strong academic records and high standardized test scores, and whether they do is often noted on the college’s website.
Remember, Ross says, financial aid packages can be appealed. In his opinion, the best strategy, in addition to asking the institution to try and match what a different school is offering, is to demonstrate the child’s enthusiasm for the school and what he or she will contribute to the college community.
“Parents need to sell the excitement their son or daughter has for that type of institution,” he says.
Green notes it’s also important to contact the school’s financial aid office — at any time in your child’s college career — should there be an event that changes your financial circumstances, such as a job loss, retirement, or loss of a parent.
This article was written by/for Wells Fargo Advisors and provided courtesy of Patricia B. Green, CFP®, Financial Advisor, Senior Vice President – Investments in Houston, TX at 713-403-7331.
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