How to Pay for Your Children’s Education

    Education Cost For ChildrenThe cost for a college education has rocketed out of sight since 2000, but so has the financial reward graduates earn when they bring home a diploma.

    Tuition and fees more than doubled at most colleges since the turn of the century, and so has the gap between a college graduate’s salary versus what a high school grad brings home.

    That created a dilemma for parents, who want a college education and its financial benefits for their children, but ask themselves: Can we afford this?
    The answer is yes, but you must be willing to be a little humble and a lot creative.

    The Department of Education, plus universities and colleges, hand out an estimated $120 billion a year in grants, work study programs and loans to 13 million students.

    An estimated $46 billion of that is grant or “gift aid,” meaning money you don’t have to pay back Another $3.3 billion in “gift aid” is available from private sources.

    Other sources for financial aid include federal and private loans; education investment accounts; prepaid tuition plans; and military service programs. A study by the Federal Reserve Board of New York said there was 92% increase in student loans from 2004 to 2014 and a 74% increase in the amount of money borrowed over that same period.

    If none of that appeals to you, there always is the old, reliable way: Have your child work his/her way through school, with just a little help from Mom and Dad.

    Start Saving Early with a 529 Plan

    The best time to start working on paying for your child’s college education is shortly after the child is born. If you are secure with the contributions you make to your  retirement savings  and can afford to put aside some money on a regular basis, a 529 Savings Plan may be a practical way to pay for college.

    A 529 Savings Plan, also known as a “qualified tuition plan,” allows you to choose investments such as stock or bond mutual funds, money-market funds and age-based portfolios to pay for your child’s college expenses.

    With 529 plans, you don’t have to pay taxes on the money the account earns, as long as the proceeds are used on college-related expenses like tuition, books, room and board.

    The 529 Savings Plans are offered by all 50 states, but an attractive aspect is that you don’t have to invest in the one run by your state. You can live in Florida and choose to invest with the 529 Plan in Texas or Virginia or Oregon, if you like. To be fair. you typically get a better tax deduction by investing in your own state’s program, which could save you a lot of money.

    The 529 Plans differ in every state, and some states have multiple plans. Each state usually has an administrator who runs the fund and handles the accounts. You also can find 529 Plans sold directly to you without an adviser, if you are confident in your ability to choose investments.

    A 529 Plan is most successful when you make steady, consistent contributions to it.  If your child was born this year, for example, and you put $100 a month in a conservative investment, there should be between $35,000 and $40,000 available when they leave for college.

    Some issues you need to be aware of with 529 Plans:
    • They do not affect your child’s ability to receive need-based financial aid as a freshman. If you use the funds to support your child that first year, however, the amount you spend must be accounted for when filling out the FAFSA form for their next year in college.
    • There is a penalty if you take money from the 529 funds for non-educational needs. You must pay income taxes on the money, plus a 10 percent penalty. The exceptions to this are if your child receives a scholarship, becomes disabled or dies. In those circumstances, you can withdraw the money without penalty.
    • There is no state or federal guarantee if your investment should lose money.
    • There typically are fees associated with buying or selling shares in the 529 plan, especially if you purchase them through a broker.

    Coverdell Education Accounts and Prepaid Tuition

    A Coverdell Education Account is similar to a 529 Plan in that the money earned is tax-free as long as it used for school-related expenses. The bonus for going with the Coverdell Account is that the money can be used for K-12 education as well as college education. The 529 Plan is only for college-related expenses.

    The drawback of the Coverdell is that contributions to a student’s account can’t exceed $2,000 a year, regardless of how many people contribute to the account. If the amount exceeds $2,000 in one year, the student will be penalized.

    Prepaid tuition is another option, though it has some drawbacks. The appeal is that you get future tuition prices at today’s rates. Typically, you pay a set amount – either in a lump-sum payment or smaller amounts over a number of years – and your child’s tuition is set, regardless of when they go to college.

    The downside is you are loaning the state your money for the right to lock in a fixed tuition rate. Unfortunately, in some states the rates charged for the prepaid plan already exceed current tuition levels. That could be why only 12 states still offer the plan.

    These are the 12 states that still offer prepaid tuition plans:
    • Alaska
    • Florida
    • Illinois
    • Maryland
    • Massachusetts
    • Michigan
    • Mississippi
    • Nevada
    • Pennsylvania
    • Texas
    • Virginia
    • Washington

    Fill Out a FAFSA form

    Once your child enters his or her senior year in high school, filling out the Free Application for Federal Student Aid (FAFSA) is the best place to start work on financial aid. FAFSA uses financial information such as tax returns, bank statements, investments, property and other assets to do a “need analysis” that tells students and family what their “Expected Family Contribution” (EFC) is going to be for college.

    Nearly every college and university in the U.S. uses the FAFSA in arriving at financial aid decisions. The difference between the actual costs (as determined by the college) and the EFC, is the amount of financial need. Schools are not forced to offer financial aid, but they may offer grants, loans or a work-study program to cover the financial need.

    But first, you must fill out the FAFSA.

    Find a Scholarship

    Scholarships are by far the most preferable form of financial aid. There is an estimated $46 billion available in grants and scholarships – otherwise known as “free money” – to help pay for college.

    Most grants and scholarships are based on financial need, merit or both. Nearly all of them require a FAFSA form to be considered. The most common one is the Pell Grant, a needs-based federal program that provides up to $5,815 per school year. There are thousands of other grants handed out by colleges, state governments, civic and religious organizations and even individuals. Go to sites like Unigo.com, Fastweb.com, Cappex.com, SchoolSoup.com and Scholarship.com to find something that fits your child’s profile.

    While it’s true that most scholarships require a great SAT score or grade-point average, there are some that award grant money based on skills or creativity. For example, the winner of the David Letterman Telecommunications Scholarship is selected based on creativity. The value: $10,000. The Duck Brand Duct Tape Stuck at Prom contest winners split $10,000 between the winning couple that wears duct tape outfits and accessories to their high school prom.

    Check out the Smart Student Guide to Financial Aid or go to Unusual Aid for more unusual scholarship awards.

    Alternative Sources for Money for College

    The online savings and credit card industry have been busy creating ways for families to save for the children’s education.

    You can create an account at GiftofCollege.com that will serve as a 529 Savings Plan for you child. Family and friends who might otherwise purchase a gift for occasions like birthdays, Christmas, etc., instead can go to your web account and deposit money that goes directly into your 529 plan. There is a 5% processing fee, which maxes out at $15.

    If you own a Fidelity Visa credit card, 1.5% of your first $15,000 spent on the card, will go into a Fidelity 529 Savings Plan that you must open. That climbs to 2% after $15,000.

    American Express also offers a Fidelity credit card that pays 2% cash back on purchases when you direct deposit into your Fidelity 529 account. Other family members can link their cash rewards to go into that same account.

    Register an account at Upromise.com and link your account to cash rewards for credit cards, loyalty cards, grocery cards and cash back on eligible purchases at restaurants, gas, movie theaters and other businesses.

    Take Out a Parent PLUS Loan

    The easiest (but potentially most expensive) way parents can help pay for their children’s college education is taking out a loan through the Parent PLUS loan program.

    The Department of Education said that 3.3 million borrowers had $74.5 billion in Parent PLUS loans to pay for their dependent children’s education in 2016.

    The best thing about the Parent PLUS loans is they are relatively easy to get and have some very enticing aspects to them:
    • This is not a need-based loan. Even wealthy parents can apply.
    • Need is not a factor in eligibility.
    • Parents can borrow up to the cost of attendance.
    • Interest rates are fixed.
    • Interest is tax deductible, based on your income.
    • Parents have choice of repayment options, including Income Contingent Repayment Plan, which is based on their income, not the size of the loan.
    Unfortunately, there also are some negatives associated with PLUS loans.
    • Credit does matter. You may not have an adverse credit history, which includes 90 days delinquent on accounts, defaults on loans, or in the last five years, bankruptcy, repossession of collateral, foreclosure or tax lien.
    • High interest rate. The rates charged for PLUS loans are the highest of any federal student loan.
    • No grace period. You must begin repaying loan 60 days after funds are disbursed. You can request a deferment, as long as your child remains in school, but that is postponing the inevitable.
    • “No limit loan” can backfire. If you decide to take the maximum amount available – whatever the cost of attendance is – you could end up more than $100,000 in debt by the time your child graduates.
    • Default looms. If you default on payments for the loan – a real possibility that visited many parents when the economy went in the tank in 2008 – you may end up having your wages garnished, your tax refunds seized and have to pay for things like collection agency costs, court costs and attorney fees. Your credit score will take a huge hit.

    If you have exhausted government loan sources, you could apply for private loans from banks, credit unions and online lenders, but those generally carry a higher interest rate and more difficult repayment conditions.

    Make Your Child Pay

    Making your son or daughter pay for college is the least attractive choice for the student, but it is one that might be the best for the family overall. A recent study found evidence that as parental aid increased, a student’s grade-point average fell. The steepest curve, according to the study by the University of California-Merced, was among the most privileged students.

    So it could be that by making difficult but sound financial decisions, parents can teach their children the same thing and both sides emerge better off for the experience.

    College Costs and Why It’s Worth It

    Paying for college always has put a pinch on family budgets, but that pinch feels more like a vice grip since 2000.

    The price of tuition and fees at in-state universities has gone up 169% ($3,501 in 2000 to $9,420 in 2016) since the turn of the century. The price of tuition and fees for out of state schools has soared 144% ($9,849-$24,070) and the cost of going to a private college is up 80% ($18,573-$33,480).

    That’s the bad news. Now, some good news.

    College graduates earned 76% more than high school graduates in 2017, according to the Economic Policy Institute. The average college graduate earned $19.18 per hour compared to $10.89 for the average high school grad. That’s the largest gap since the EPI started following this statistic in 1973.

    Put another way: Over the course of a lifetime, college graduates will earn $2.1 million while high school graduates earn $1.2 million.

    So, yes, a college education is worth it. The question families must answer is how much of the burden for paying that should fall on the parents?

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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