You probably started thinking about it when your child was very young. You may even have thought about it before your child was born, perhaps while you were shopping for a bassinet and a teddy bear. After all, it’s one of the major responsibilities you face as a parent: your child’s college education.
Personal growth and expanded horizons are reason enough to send a child to college, but there are more practical considerations, too. College graduates have more jobs to choose from, and they generally make more money than people who only have a high school education. That makes a college education very important for your child’s future.
The dream of a college education is becoming out of reach for too many American families. The cost of college is daunting, and a family’s ability to afford college depends on many factors, including college costs, income, assets, availability of financial aid, and family size. However, the cost of not going to college significantly impacts the student’s earning potential.
As a result, most families must rely on additional resources to supplement the high cost of college. Since the availability of government grants does not meet the demand for a college funding solution, students often create a tremendous debt burden to obtain a cherished degree.
We are now witnessing a generation that starts their financial future with a $100,000 debt before they get married and own a house! This dilemma is usually caused by a lack of financial planning. There is not enough paycheck at the end of the month to save for college. Consequently, financing a college education may involve three generations; grandparents, parents and children.
COLLEGE PLANNING VS. RETIREMENT PLANNING
“How old will you be when your last child graduates from college?” Consider the following data from Statistical Abstracts:
Aging baby-boomer population
− 1980 -20% of total births were to women over age 30
− 1996 -35% of total births were to women over age 30
Today, parents are waiting longer to have children and will have fewer years to “catch up” with retirement once their last child graduates from college. Many parents finance college expenses without even considering how it will affect their retirement goals. Without linking college to retirement and developing a total life financial plan, random withdrawals from a retirement fund to cover college expenses could force parents to work longer than they had expected until retirement, or live on less during their golden years.
Furthermore, this dilemma increases as income rises. Since a college education is paid using “after tax” dollars, the amount the family must earn to pay college expenses increases as their tax bracket increases. In other words, a family must first pay the IRS before they pay the college.
College expenses can also affect retirement goals. The amount spent on college expenses can dramatically affect the amount of money which could have been contributed to a retirement fund. This leaves a family with a difficult decision when it comes to choosing between a public university and a private college.
THE HIGH COST OF DELAYING YOUR COLLEGE SAVINGS PLAN
Once saving becomes part of your budget, money will begin to accumulate. It’s important to take advantage of the financial strategies that will help your savings grow in value. Perhaps the most important thing you can learn about saving is the importance of compounding — given time, compounding makes small investments large. Consider the following chart.
As you can see, time is a critical component to make investments grow. It’s not just how much money you save that counts, it’s also how much time you have for that money to work for you. You need to start saving as early as possible.
FINANCIAL AID VS. FINANCIAL PLANNING
There is much controversy regarding financial aid today. College costs have been rising at twice the rate of inflation for the past 20 years. Since then, many fee-based scholarship matching services and financial aid seminar companies have arisen claiming they can help any family find additional monies for college expenses. Many of these organizations are scams!
It’s important to note that much information is available on the Internet, or directly from the colleges themselves, on the subject of financial aid. While the financial aid officer at most colleges can help guide the family through the daunting financial aid forms, many families will find that they only qualify for loans due to income levels above financial aid thresholds.
However, even if the family does qualify for some financial aid, most families will still have a difficult time coming up with the balance of the money that is owed to the college. In college terms, this balance, or family obligation, is called the Expected Family Contribution or EFC.
So where does the family find the money to cover this EFC? Most families use a combination of current income, savings, loans and maybe a small gift from relatives. Some families may even resort to raiding their retirement funds to pay this obligation. There are also many cash flow, financial planning and tax strategies which could provide additional funds to cover the EFC. However, most families are not familiar with these educational funding techniques.
There are several strategies which can enhance cash flow and increase liquidity to provide funds for college expenses. Many of these strategies will work well with other types of financial planning strategies; such as, creative borrowing techniques and the restructuring of debt. The key is to create a detailed plan, based on your unique circumstances, that shows which of these various strategies you may use in the future to pay for college. In addition, the plan should provide a timeline showing the actions you should be taking along the way in order to achieve your goal.
To get started on your college savings plan, contact Chris Ingram, Financial Professional at (661) 255-9555 ext. 16.
Christopher M. Ingram
25060 Avenue Stanford, Suite 100
Valencia, CA 91355