It’s almost back-to-school time. If you have young children going to public schools, your biggest expenditures may be on pens, pencils and notebooks. But if you want those same kids to go to college someday, you’ll eventually face considerably larger costs – so you may want to start preparing soon.
College is costly. For the 2015-16 school year, the average expense (including tuition, fees room and board) was nearly $20,000 at a public, four-year school, and more than twice that amount at a four-year private school, according to the College Board.
Of course, cheaper alternatives are available – your children could go to a local community college for two years at a very reasonable cost, and then transfer to a four-year school.
Still, if your child does go on to get a bachelor’s degree, those big bills will eventually arrive. As you consider how you can best deal with these costs, ask yourself these questions:
l How much can I afford to contribute?
As much as you’d like to help your children pay for college, you also have to think about your own needs – specifically your retirement. Think very carefully before reducing contributions to your retirement plans, such as your IRA and 401(k), to help fund a college savings plan. After all, your children may be able to get scholarships and grants, and even if they have to take out loans, they’ll have many years in which to repay them – but you can’t postpone saving for retirement without jeopardizing your ability to enjoy a comfortable lifestyle. When it comes to prioritizing your financial goals, putting yourself first is not necessarily a selfish act.
l What college savings plan should you consider?
A number of college savings options are available. For example, you could contribute to a 529 plan which offers potential tax advantages and high contribution limits. You might also consider a custodial account, such as an UGMA or UTMA, although when your children reach the age of majority, they are free to do whatever they want with the money – and their plans may not include college.
l What will be the effect of a college savings plan on financial aid?
When colleges determine financial aid packages, they will evaluate your child’s assets differently than your assets. Your child typically would be expected to contribute 20 percent of his or her assets, while you are only expected to contribute up to 5.6 percent of your assets. Consequently, you may be better off saving for college in your name, rather than your children’s.
Under the federal financial aid guidelines, an UTMA/UGMA account is classified as a student asset, while 529 plans are counted as parental assets if parents are the account owners. (The rules on financial aid are not always so clear-cut, however, so it might be worth your while to contact a financial aid officer at a local college or university to ensure that your chosen method of saving will still allow for the greatest possible assistance.)
As you can see, you’ve got several factors to think about when it comes to helping your kids meet their higher education goals. Study up on these options, so you can find the right answers for your family’s needs.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor (member SIPC). Contact Stan at Stan.Russell@edwardjones.com.