Don’t wait to get educated about college planning!

By Matt Hoke, CFP^®, ChFC

We recently celebrated sweet-sixteen birthdays for our twin “babies” (what happened to my tiny toddlers?!), so I suppose it’s no surprise that I have college planning on my mind.

With two girls heading into their last years of high school, like many parents with teenagers, I feel like there are dollar signs swirling around my head! Whether your children are in diapers or walking out the door to their own college adventures, here are a few things to know about college planning that can help make paying for education as painless as possible—for you and for your college-bound kids:

1. College costs—and student loan debt—are rising.
   Anyone with kids is well aware of the rising cost of college tuition. According to the National Center for Education Statistics, the average cost per year for the 2015-2016 academic year (the newest statistics available) including tuition, fees, and room and board was over $19,000 for a public four-year university, and about $40,000 for a private university.
   
   For many families, those numbers are pretty overwhelming. As a result, student loan debt has become a bona fide crisis in the US. The US Federal Reserve has reported that more than 44 million borrowers in the US owe an incredible $1.5 trillion in student loan debt. Among students who graduated from college in 2018, 69% took out student loans, and their average student loan debt was $29,800. And that’s just the students! Of that group, 14% of their parents took out an average of $35,600 in federal Parent PLUS loans to help.
    
2. Planning is key.
   All of those numbers point to one thing: planning is vital to avoid crippling college loan debt. And yet many families find that difficult, at least in part because it’s near to impossible to anticipate the actual cost of a college education. Tuition costs are a moving target, and you likely won’t know where your child will go or how much assistance they will receive through scholarships and grants until you’re ready to open the checkbook at the start of your child’s freshman year.
   
   Luckily, there are steps you can take today to begin building an optimal savings plan. Start by exploring your own expectations. Do you plan to fund part or all of your children’s school expenses? Do you want your children to have some ‘skin in the game’ by working while they are in school? Is your goal to have your children attend public or private college? Though your answers are likely to change as your kids get closer to college age, setting expectations early can help you build a plan that fits your values and lets your children know what to expect as well.
    
3. Tax-advantaged savings plans can help.
   The 529 plan is the best-known and most-used college savings plan. Its popularity is largely due to its fantastic tax benefits. While the money you put in to a 529 plan can’t be deducted from your federal taxes, it grows tax-free as long as the funds are used for qualified educational expenses. Assuming you start saving when your child is an infant, that’s 18 years or more of tax-free growth! You can even withdraw up to $10,000 per year, per child, to pay for elementary and secondary school tuition (though be careful not to rob Peter to pay Paul!).
   
   At the state level, Indiana residents get an amazing additional tax benefit: a 20% tax credit on up to $5,000/year contributed to a 529 plan, saving up to $1,000 in state taxes. Michigan offers a pretty good deal as well, allowing you to deduct up to $5,000 per year of contributions for an individual and up to $10,000 of contributions for a married couple on your state taxes. As of 2019, the annual per-account contribution limit for 529 plans is $14,000, which offers a great opportunity for families who can afford to contribute at the maximum level.
    
4. Money saved is not money wasted!
   If you’re concerned that accumulating assets for college will hurt your student’s ability to receive aid via the FAFSA (the Free Application for Federal Student Aid), don’t be. As long as the 529 plan is in a parent’s name, it counts as a parental resource—not the student’s savings. To determine the Expected Parental Contribution, the FAFSA looks at a variety of factors, including annual income, net worth, number of children, and more. ‘Parental Assets’ are just one piece of the larger equation, and the impact is minimal.
   
   Also, remember that the FAFSA is used to apply for more than just federal loans; it is used to access grants, merit-based scholarships, and work-study programs that do not require repayment. Even If your student is eligible for loans, that money must eventually be paid back—with interest. The wiser path is to save early to minimize or even eliminate the reliance on student loans.

Of course, none of us can predict the future, and not every child opts to go to college. So what happens if you wisely save for 18 years and your child decides not to use that well-saved college fund after all? Good news! The money is not wasted. 529 plans allow you to change the beneficiary at any time—and even multiple times—to make the funds available to another child, grandchild, or even to use the funds to pursue additional education yourself. As long as the money is used to pay for qualified educational expenses at an accredited public or private school, you will receive the tax benefits. And in the off chance that no one in your family chooses to use the funds for education, you can still withdraw the assets. Though you will be taxed on the growth and have to pay a penalty, you’ll still have saved a nice nest egg thanks to the magic of compounding. It’s a win-win, no matter how you look at it.

And if your child is already prepping for college and you’ve missed the window for saving early, all is not lost! Sit down with a Certified Financial Planner™ (CFP^®) now to create a smart plan moving forward.