My Daughter’s Having a Baby. How Much Will College Cost in 18 Years?

Get ready for some sticker shock.

Q. My daughter is having a baby and I want to save for college. How much would I need to save each month to have enough so the grandbaby won’t need loans? And is a 529 plan the best place to save?
— Grandma-to-be

A. Congratulations on your family’s new addition – and get ready for some sticker shock.

You’ll need to save a whole lot of cash if you want to fully fund this child’s education.

We asked Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield, N.J. to run the numbers.

He assumed you’re starting with a zero balance. Then he assumed conservative 4% growth rate on invested funds and a 5% inflation rate on annual cost of education.

Using Rutgers University as a state school example, the total cost of a four-year undergrad degree including room and board will be $463,812 when your grandchild attends college, DeFelice said.

“To be able to pay for that in full you will need to save $1,231 per month or $14,775 per year through the year 2037 given the above assumptions,” DeFelice said.

Using Princeton University as a private school example, DeFelice said, the total cost of a four-year undergrad degree including room and board will be $611,641 when your grandchild attends college.

To be able to pay for that in full, he said, you will need to save $1,624 per month or $19,484 per year through the year 2037.

These are sobering numbers indeed.

DeFelice said it’s entirely possible that the assumptions he used are way off base.

He said 5% is the historical educational expense inflation rate over the past 15 years, and we don’t know if college costs will continue rise at that torrid pace.

“My personal feeling is that something needs to be done about the skyrocketing cost of education in this country, but that is an argument for another day,” he said.

He also said a 4% investment return is conservative compared to historical stock market average annual gains. But given how far the market has come since the 2007-2009 financial crisis, DeFelice said he thinks it’s prudent to conservatively plan for lower than normal returns in the future rather than hope the good times will always continue.

You should also consider that your grandchild may qualify for some form of financial aid, receive scholarships, and/or attend a less expensive school than the ones we used as examples.

“Don’t forget about the child’s parents either – they can and should be expected to contribute as well,” DeFelice said. “We are seeing multi-generational college education funding strategies come into play more and more today than ever before, where both parents and grandparents come up with a strategy to do what they can afford to do given life’s other demands.”

Of course, not everyone is able to put aside this much money, and you shouldn’t shortchange your retirement to do so, DeFelice said. While fully paying for college for your grandchild is a noble goal, remember, you can always borrow money for college but you can’t borrow money for retirement.

As far as savings vehicles, a 529 plan is still the most tax-efficient account to pay for college on the market today, DeFelice said.

It’s important to note that if the grandparent is listed as the owner of the 529 plan, it can actually hurt the student’s chances to qualify for financial aid, DeFelice said.

“While grandparent-owned 529 plans do not get counted in the parents’ asset calculation formula, money coming out of the plan to pay for college is considered a gift to the student,” he said. “This will be viewed as untaxed income for your child for financial aid purposes, and can impact the student’s aid eligibility by up to 50% of the distribution in the following year.”

For that reason, DeFelice said he usually recommends the 529 plan be opened up with the parents as owners, and the grandparents can gift money directly to the plan itself, or to the parents who would then in turn deposit the funds.

You can find more strategies for paying for college without building a mountain of debt here

Image: Phrysphotos

The post My Daughter’s Having a Baby. How Much Will College Cost in 18 Years? appeared first on Credit.com.

How To Talk To Your Kids About Student Loans

Student loans are much more of a reality for kids today than they were for their parents and other previous generations of college students. The cost of education has risen so quickly that in 2014 almost seven out of 10 students graduating college had loan debt—nearly $29,000 each, on average.

This means discussing student loans needs to be a key part of family discussions on college. The earlier these talks happen, the better. I know this first-hand, as my eldest daughter is a college freshman this year.

Affordability is key

The conversation about how student loans work can include talks about what your family can afford in terms of college. At one end, a family may decide that they will find a way to pay for the best colleges to which their college-bound student is admitted—no holds barred. Even if both parents have to get second jobs, they will pay for their child to attend the most prestigious college to which he or she is accepted.

In our family, the chat was quite different: We told our daughter what we could afford and invited her to apply to colleges that were reasonably within our budget range. There was no sense in having her look for her “College Charming” and then tell her we couldn’t afford it.

We also talked early—during her sophomore and junior years in high school— about student loans and the importance of limiting them as much as possible. Why? Heavy student loan debt can be a tremendous burden on new college graduates. It can limit their choices of jobs because they often must earn enough to pay off their debt, especially if they can’t count on financial help from parents or other family members. In the long run, significant student loan debt, like any other debt, might also delay or limit the borrower’s ability to buy a home, start a business, or even begin a family.

How much is too much?

Syndicated author and radio talk show host Clark Howard suggests students not take out more in student loans (in total over four years of college) than the entry-level salary they can expect to earn their first year after college. If the student expects to earn $30,000 in their first job, that number should be the ideal student loan limit in total. (College students can estimate entry-level wages in their field with online tools such as salary.com.) Of course, seeking advice from financial aid consultants might be helpful (if pricey), and many colleges offer financial aid resources.

Learning about loans

The U.S. Department of Education requires students to enroll in online counseling when they first take out federal student loans. Sitting through it with your student may provide opportunities to help explain the concepts covered, such as accruing interest and repayment rules.

The repayment calculator was a huge eye-opener for my daughter, as she was able to see what her student loans could cost her in actual monthly payments. Making the loans real is a great way to discourage overborrowing.

More things for students to consider

Emphasizing a few key factors may be helpful to your student in understanding the essentials of college loans. For instance:

  • Personal expenses. Loans aren’t intended to cover personal expenses. Your child could cover pocket money by working during college, even if that’s just five to 10 hours per week.
  • Quitting college. If your student leaves school or drops down to less than part-time status, there is only a six-month grace period before your son or daughter must begin paying back federal student loans.
  • Credit score. Paying loans on time and as agreed to helps your student keep his or her credit score healthy, which is important when attempting to rent an apartment, get a car loan and much more. Credit reports are available for free one time each year at annualcreditreport.com.
  • Declaring bankruptcy. It’s very tough to walk away from unpaid student loans. Even if other debts are discharged during a bankruptcy, you will usually remain responsible for any federal student loans. Again, this underscores the importance of not overborrowing.
  • Charging college expenses. Using credit cards is not a good choice for paying for college. A close relative of mine charged his entire senior year of college on credit cards. As you might imagine, the interest rates make paying back the loan amount incredibly challenging.
  • Private student loans. These loans should be considered carefully, and perhaps only as a last resort. According to Howard, private student loan interest rates may be much higher than federal loans, and a student often has little flexibility on repayment plans. Like other school loans, private loans are not usually discharged during a bankruptcy. Students short on money might be better off attending a less expensive community college for their first two years to satisfy many general education requirements. Others might consider working more hours and attending school part-time if necessary. Borrowing from family members such as grandparents might be another option.

 

Post-college plans and opportunities

We emphasized to our daughter that paying off student loans should be her first priority after college. Our family places a high importance on living free of debt, and she’s getting the message that student loans are no exception to this rule. We are encouraging her to plan on “living like a student” for several years after she graduates so that she can put every dollar possible toward paying off her student loans.

Depending on your graduate’s line of work, he or she may also want to look into student loan forgiveness programs. Many teaching and public service jobs offer this as a benefit to encourage college graduates to work in underserved communities.

As Mary Hunt, author of the book Raising Financially Confident Kids, wrote: “It’s not as if student loans and big credit card balances are mandatory graduation requirements. … It is possible to graduate debt-free, but it does take a lot of work. And you’ll have to buck a financial system that encourages students to take the easy way out by diving into a lifetime of debt.”

 

The Number of Parents Saving for College Is at a 4-Year High

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Putting money aside for any type of financial goal — whether it’s a new car, house or even that pair of shoes you’ve been dreaming of — is a great accomplishment. Sometimes all you need is a few months to save, while other times it can take decades. Such is the case with paying for college, something many parents start saving for when their first child is born. But how many are really thinking this far ahead?

Quite a few, apparently. At least that’s what a new survey from Sallie Mae, a private student loan servicer, discovered. In fact, the report shows that the number of parents saving for their child’s college education is at a four-year high — 57% of parents report they’re doing so this year, compared to the 48% last year.

And it’s not just the volume of parents who are doing this that has increased. The survey reports that they’re saving more now too, with an average of $16,380, up more than $6,000 from last year. Millennial parents are leading the charge on how much they’re saving for their child’s college education, with $20,155, followed by $18,323 saved by the Baby Boomer generation.

Methodology

Sallie Mae paired with Ipsos, a market research company, to conduct this survey. Ipsos ran an online survey from May 26 to June 6, 2016, which gathered interviews with 1,959 adult parents with children younger than 18. The survey was conducted in both English and Spanish and reflected a “cross-section of key demographic variables in the United States,” according to the report.

The results were weighted by gender, age, race, religion, education and household income crossed by race, with all demographic profiles coming from the November 2012 U.S. Census Bureau’s Current Population Survey (CPS). The survey has a margin of error of approximately plus or minus 2.2 percentage points, with a confidence level of 95%.

Saving for College 

If you’re a parent who is putting aside money for your child’s education, it’s a good idea to start as early as possible to give yourself time to save as much as you can before the college acceptance letters start pouring in. This is even more true for parents who have more than one child, as they’ll want more funds. But it’s also important for parents to talk with their kids about their financial situation and think about all options when it comes to paying for college, including scholarships and student loans.

It’s also essential to consider the effect student loans have on your credit. Having these loans can certainly help diversify your credit profile, but that will only be so beneficial. If you default on one, your scores can be extremely damaged. And this can impact your future in all sorts of ways, like when it comes time to take out a mortgage or car loan. Some employers even look at a version of your credit report as part of the application process. To keep an eye on how your financial habits are affecting your credit, you can view your free credit report summary, updated every 14 days, on Credit.com.

Image: XiXinXing

The post The Number of Parents Saving for College Is at a 4-Year High appeared first on Credit.com.

Why 529 Plans Aren’t Bad for Financial Aid

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There’s a lot of misinformation out there about 529 plans, and one of the biggest pieces of bad advice I hear is that you should avoid saving within a 529 plan because it will hurt your child’s eligibility for financial aid.

I’m sorry, but that’s ridiculous.

Here are five reasons why you should absolutely NOT avoid a 529 plan for financial aid purposes.

Note: The information here is based on the FAFSA formula for financial aid. A college that uses the CSS Profile may calculate things differently, but that’s on a school-by-school basis. Please consult with a financial professional before making any decisions for your personal situation.

Reason 1: The Impact on Financial Aid Is Small

It is true that saving money within a 529 plan hurts your financial aid eligibility. However, the impact is small.

Only 5.64% of the money within a 529 plan is counted against financial aid. So you could have $100,000 saved up, but only $5,640 of it would be considered when calculating your child’s financial aid eligibility.

That amount really isn’t going to make much of an impact.

[A 529 Plan Help Parents (and Grandparents) Save for College]

Reason 2: Financial Aid Is Not Guaranteed

None of us have any idea what financial aid will look like 10-20 years down the line. And you certainly can’t predict what your child will qualify for and how much he or she will receive.

Your child may not be eligible for financial aid, or may not receive as much as you would like.

Or your child might qualify for financial aid in the form of student loans, which would bring on a whole set of other issues.

The bottom line is that while you can certainly hope to get help with your child’s college costs, nothing is guaranteed.

On the other hand…

Reason 3: Saving Is Guaranteed

While you can’t control financial aid, you can control how much money you save.

Would you rather be in the position of hoping that someone else deems your child worthy of receiving help, or would you rather have the money available yourself to give your child choices?

It’s better to have the money available in a 529 plan or other savings account so that you can use it as you please, even if it means receiving a slightly smaller amount of financial aid.

Note: While the amount you save is guaranteed, investment returns are not.

[Decoding Proposed Changes to the FAFSA]

Reason 4: Retirement Accounts Have Their Own Pitfalls

There’s an argument out there that you should contribute to a 401(k) or IRA instead of a 529 plan because money within those accounts doesn’t hurt your financial aid eligibility like money within a 529 plan does.

To be honest there’s some truth to this argument, though not necessarily for the reasons given. And there are also some major pitfalls to watch out for.

The real reason to contribute to a retirement plan before a 529 plan is that retirement should be a much higher savings priority than college. You have many options when it comes to paying for college, but your personal savings are your only option for retirement beyond Social Security. So it’s a good idea to make sure your retirement savings are on track before saving for college.

But the argument that it’s better for financial aid purposes is weak.

It’s true that money within a retirement account doesn’t count towards financial aid. But remember that only 5.64% of 529 savings are counted, so again the difference here is minimal.

Plus, the only way to use 401(k) money for college without facing a penalty is by taking a loan from the plan, which generally isn’t a good use of that money.

While an IRA can be used for college savings without penalty, any money withdrawn from an IRA for college will be counted as income when calculating the NEXT year’s financial aid eligibility. And income hurts financial aid much more than savings, so this strategy could end up backfiring in a big way if not used carefully.

So while I would encourage you to get your retirement savings in place before saving for college, that advice has very little to do with financial aid. If your retirement is on track and you’re looking for a place to put your college savings, a 529 plan is usually a better option.

[Using a Roth IRA as a College Savings Account]

Reason 5: 529s Have Built-In Flexibility

One argument against 529 plans is that if you don’t end up needing the money for college, you’ll face taxes and penalties when you use the money for other purposes.

Just below I’ll explain why this is a good reason to be cautious, but first it’s important to understand that 529 plans have some built-in flexibility that protects against this issue.

First, you’re allowed to change the account beneficiary to any family member. So if the child you opened the account for doesn’t end up needing the money for college, you could use the money for a sibling, for yourself, for a spouse, for a grandchild, or any other family member.

Second, the money can be used tax-free for many different higher education expenses, not just a traditional 4-year college. For example, I used 529 money to pay for the coursework I needed for my CERTIFIED FINANCIAL PLANNERTM certification, courses I took part-time and online while I was working a full-time job.

So if your child does end up earning scholarships or qualifying for financial aid, there are still options for using the money without facing taxes or penalties.

One Good Reason to Be Cautious

With all of that said, there are some good reasons to be cautious about saving too much money within a 529 plan.

The main one is simply that we have no idea what college will look like 10 to 20 years down the line. Will it be even more expensive? Will it be fully paid for by the government? Will self-directed online courses be norm?

With all of that uncertainty, it may make sense to consider saving at least some of your money in a more flexible account, like a regular old taxable investment account. You wouldn’t get the same tax benefits as a 529 plan, but you may have more options when it comes to helping your child pursue new opportunities.

Don’t Avoid a 529 Plan for Financial Aid Purposes

The bottom line is this: don’t let financial aid eligibility scare you away from a 529 plan. If saving within a 529 plan makes sense for you otherwise, then you should go ahead and do it.

The post Why 529 Plans Aren’t Bad for Financial Aid appeared first on MagnifyMoney.