Every Oklahoman knows that in our state, college football is king. While we really like watching the games, especially when the Sooners, Cowboys, and Golden Hurricane are winning, we also love following rankings. We follow the recruiting rankings to see who the top players are and if our school is on their list. We follow the pre-season rankings to see if our team starts in the top 10. We like to see our team’s stadium and fans ranked as the best. We all rank the opposing teams we hate the most…other than Texas.
All this thinking about rankings brings to mind another list for college. Á la David Letterman, here are the top 10 college funding tips for parents:
10. Save early and often.
As with investing for anything, the earlier you start saving for college, the better. Be sure to budget regular additions if possible. You don’t need to have your child’s entire future planned. Just start setting aside a little each month. Compound interest works whether they get a degree in medicine or music.
9. Choose the right investment vehicle for you.
Aside from saving for college, what else is important to accomplish with this money? Tax deferral and avoidance? Flexibility for how to use the money? Professional management and expertise? The answers to these questions can determine whether you go for a 529 college savings account, a simple brokerage account, or a trust. There are many ways to save, so talk to your financial advisor about the pros and cons of each option.
8. Know what counts.
There are some numbers you can estimate that will help you settle on a savings goal. These include the average cost of a year of college, the expected inflation rate of tuition, the number of years until they enter school, the number of years they’ll be in school, and your expected rate of investment return.
7. Don’t let emotions get in the way.
Getting into a prestigious university looks good on a resume. It also puts a dent in the family budget. Keep an open mind when looking at potential schools, and don’t get too hung up on the name. In most cases, that piece of paper you get at the end called a degree will work just about anywhere, regardless whether it cost $5,000 or $50,000 a semester.
6. Ask grandma and grandpa for help.
Or the whole family for that matter. In place of one toy or video game at birthdays and Christmas, ask for a contribution to your child’s college savings fund. Also, tuition payments made as a gift to your child and paid directly to the college are not subject to gift tax or the Generation Skipping Transfer Tax.
5. Learn how financial aid works.
The Free Application for Federal Student Aid (FAFSA) is what you’ll use to apply for financial aid, and a formula will determine your Expected Family Contribution. Many retirement assets are excluded from the calculation, but other assets could disqualify your child from receiving federal aid, whether in the form of loans or grants. And get this…shifting assets into your child’s name may not work, since the formula looks at their available assets as well. Other sources of funding like Federal Pell Grants, Stafford loans, and PLUS loans are also available.
4. Seek out scholarships.
Skip the student loan party altogether and apply for every scholarship your child qualifies for. Many scholarships are awarded for things other than academic achievement, like the arts, athletics, and ethnicity. You can pay for someone to help you with this, but much of the research is available for free online.
3. Put tax credits to work.
The American Opportunity Tax Credit (formerly Hope Credit) is a maximum $2,500 credit per student parents can take on their tax return for expenses related to the first four years of college. For 2016, it is phased out completely for married taxpayers with income above $180,000, and single taxpayers with income over $90,000.
2. Don’t use your retirement accounts.
There are some tax breaks available for using distributions from retirement accounts like IRAs to pay for qualified education expenses, but unless you just absolutely have no other means to help your child pay for college, avoid tap
ping your retirement accounts. They took you a long time to accrue, and you can never get back that time once you’ve spent it.
Take care of yourself first.
Everyone who’s ever been on an airplane knows that, if there is a loss of cabin pressure, you should put on your own oxygen mask first before helping others. You love your kids. You want them to have everything you didn’t, and you want them to get a great start in life. But your kids will one day grow up, move away, and you’ll be left to fund 30 years of unemployment in retirement without their help. Take care of your retirement first, then your child’s college fund. Your child will find a way to succeed. They will have had a great example in you.
Damon King is a candidate for CFP® certification, and a licensed Investment Adviser and insurance
professional with ChappelWood Financial Services in Edmond, OK. He is co-host of the weekly radio show It’s All About the $Money, Honey on NewsRadio 1000 KTOK in Oklahoma City and NewsTalk 960 KGWA in Enid. He can be reached at Damon@ChappelWood.com or 405-348-0909.