Kalman A. Chany is the founder and president of Campus Consultants, which helps many families maximize their eligibility for financial aid. He’s also the author of Paying for College Without Going Broke, 2009 edition, which will be released in October 2008. Here, Chany explores some smart financial moves to make based on your child’s age.
With 529s, you’re basically buying a basket of mutual funds. Depending on what investment strategy you follow, that will determine what is in the basket. Your choices of where to invest the money are limited by the plan. In some cases, the management fees are higher than if the same mutual funds were in a non-qualified account.
It’s a good option, but the one thing to look at is the plan you’re going to go into. You want to do a little homework. Sometimes people go through a broker, and that broker might not sell your own state’s plan, which can have some extra goodies such as a state tax deduction.
Time is your greatest asset. The sooner you begin planning, the better off you’re going to be. Remember, you don’t need to have the whole college tuition funded by the time junior steps on campus. That’s a big thing to keep in mind. When people see how much they have to save for college, it often forces them into paralysis and they do nothing. That’s the worse case scenario.
At this point, also consider investing in yourself. As your child is getting older, consider getting an advanced degree or further your own education to get a better paying job. There are tax benefits you may be able to claim by going back to school, and/or your employer might even pay for it. If you improve your skills, then you can improve your cash flow so you can contribute more funds to your child’s college nest egg.
If you get a bonus or a windfall, add a significant chunk of that money to the child’s college fund.
If you haven’t done anything at this point, don’t go into panic mode. You might want to contribute more money than if you started sooner, but try not to be turned off by the projections of how much college will cost and how much you would need to contribute each month to have the total cost paid for by the first year of college. Get used to contributing to the college fund on a regular basis. If you have a 529 plan or other funds already set up, consider investing with a slightly more conservative asset allocation model as the child gets older.
The old rule of thumb used to be that colleges just looked at academic transcripts of the junior and senior years of high school. Now many schools look at the full four years of high school. Start encouraging your child to take a rigorous course load. It’s not too early for them to start developing their special talents and skills if they want to be attractive to certain colleges. Encourage your child to do his or her best academically, because it might get your child into an honors program by the time they reach high school.
If you didn’t start, doing something is better than doing nothing. However, you want to be careful where you put the funds, so as to not jeopardize aid. If the funds are already set aside, the early years of high school are a good time to get a handle on whether you’re eligible for need-based aid or not. That will have a major impact on what you do with your funds since assets in the child’s name have a greater impact on aid eligibility than if those same funds are considered a parental asset. If you are likely to qualify for need-based aid, be aware that under the current aid formulas, January 1st of your child’s junior year is the first base income year for aid applications. That means that any discretionary income, such as withdrawals from your IRA, interest from cashing in savings bonds, or capital gains, should be minimized because that extra income can influence how much assistance you can be awarded.
Continue to encourage your child to do well academically. This goes without saying. Your child should focus on extra-curricular activities and skills that could make your child’s application more desirable, especially if you are considering selective colleges. It’s better to be really good in one thing than to have a laundry list of activities where there’s superfluous involvement.
If Johnny has cash in accounts in his name, that would be a student asset. Such assets are assessed at up to 25% in the financial aid formulas, compared to a maximum of 5.65% for funds in the parents name. There’s also some assessment if Johnny is the beneficiary of a custodial account. However, funds in a 529 plan or Coverdell account owned by a parent for benefit of a child are considered to be parental asset for aid purposes.
If you’ve got to make a choice in funding a 529 plan, you’d be better off contributing at least some of the funds to the younger child’s account because the money can grow tax-deferred for a longer period of time. If college is still in the distant future, the fund probably shouldn’t be going into mostly money markets and bond funds because the returns are not likely to keep pace with tuition inflation. However, you don’t want to be chasing yields when college is a few years off. If there’s a reversal in the market, the funds may not recover by the time you need the money for college.
The myth about paying for college is you win an outside scholarship, pay for it, and/or take out loans. Most families make this mistake because they don’t understand that a considerable amount of grant and scholarship assistance is funded by the federal government, state governments and the colleges themselves. You need to be a savvy consumer. When you go to the information sessions conducted by the colleges, they’re always telling you, “Don’t worry about the cost, we’ve got plenty of aid.” What most families don’t realize is the information session is a sales presentation. At some schools, the more admissions applications they get the more money the admissions officers get paid. More and more these colleges act like corporations. You have to understand that higher education is big business, and it’s not in the colleges’ best interest for you to know how the admission and aid processes really work.
It’s easier to go with the flow than to resist change. It’s like the book, Who Moved My Cheese?, which covers how different people handle change. Some are fine and welcome it. In today’s world, with all the changes going on, you can’t keep living in the last century. Change is inevitable. Accept the fact that there will be change and learn to adapt.
…that it creates opportunities, especially if you’re nimble. If you can go with the flow, that’s helpful.
The best change was when I stopped working for somebody else and set up my own company.
For more information on Kalman A. Chany, visit www.campusconsultants.com.
This book is thoroughly revised and updated to take the stress, confusion, and guess-work out of applying for financial aid....