Andy McNamara, CFP®

Andy McNamara, CFP®

Andy is a CERTIFIED FINANCIAL PLANNER™ and Associate Wealth Advisor with The Gensler Group.

College Costs: How to Pass the Stress Test

Congratulations! Your son or daughter was accepted into college –now what?

It’s that time of the year again when high school seniors decide which university they will attend in the Fall of 2019. While students are stressed out by the biggest decision of their young adult lives, their parents are stressed for the same reason and another big reason: how are we going to pay for their education?

If this is the first time you have really thought about it, don’t panic. There are some things you can do immediately as your next steps:

1. Have a very honest conversation with your spouse about your current assets and budget.

If you are in a position to help out your child with tuition, books, etc., that is wonderful. But all too often we have seen parents financially “over help” their child and it may materially degrade their own ability to be self-sufficient later in life and manage their own saving funds, including retirement. Additionally, as parents, of course you want the best for your kids, and helping them pay for college is a good investment in their future, but consider the cost to your own future as well. They have the rest of their working lives ahead of them to pay back their loans, while you may just have a few years left until retirement.

2. Consider reducing the cost of college by staying in state or taking advantage of the community college system.

Enrolling in community college can be a cost effective solution for your child to figure out their chosen major while earning their general education requirements.

There are many student loan options and tax credits available, make sure you familiarize yourself with the American Opportunity Credit, The Lifetime Learning Credit, PLUS, Perkins, and Stafford Loans and well as Pell Grants.

Now, if you are a parent with young children and are thinking ahead, what is the best way to reduce that future stress of paying for your precious little peanut?

Look at Code 529 in the IRS handbook.

Just kidding –  I will summarize what it says because who in their right mind wants to search through the tax code line by line?

According to Code 529, as a parent, grandparent, family member, or interested party, you can set aside money for a child now to pay for their higher education expenses in the future. After the 2018 Tax Cuts and Job’s Act, you can actually use these funds for tuition at a private high or middle school as well.

How exactly does it work?

You must choose a state sponsored plan (any state plan works when living in California) and choose your investment portfolio for the account.

The money grows tax deferred and any principal and growth withdrawn from the 529 account to pay for “Qualified Education Expense” will be tax free.

Qualified expenses include tuition, fees, textbooks, supplies and equipment required for enrollment, and in most cases, room and board.

One of the most powerful financial tools you can use is the power of compound interest. By saving for college early, you can greatly reduce the actual amount of money you need to save.

Let’s take a look at 2 examples:

1. Mr. and Mrs. Smith start saving $150/month when their daughter is a newborn, they will have about $67,000 when she turns 18 assuming an 8% growth rate.

2. Let’s assume all other factors are the same, but they wait until she is 3-they will have about $49,000 at their disposal for education expenses.

What a difference 3 years makes!

Now you can imagine the “cost” of waiting longer to start investing in education expenses.

In the end, with all of life’s obligations, it can be tough to save for all of your financial goals, which is why, at the very least; even a plain old-fashioned budget sheet can help. If you can squirrel away as little as $50/month away, consider yourself a forward thinker and already on track to helping with future education expenses! Whichever financial advice from above that you take, give yourself a pat on the back, take a deep breath, and enjoy the beautiful Coronado sunset tonight, because the next thing you know, you will be dropping them off at freshman orientation. 

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