In this week’s case study, we look at a family with two children, ages 8 and 10, who need to start considering future education costs. With so many options and sources of information available, it can be overwhelming as to where to start. College is a major expense that is increasing at more than 5% per year—considerably more than average inflation.
Funding a child’s college education is a goal of many parents, and while we certainly applaud your goals, you first and foremost need to understand there are external sources available for college funds. There are no such programs to fund your own retirement. In our opinion, you should not put your child’s education ahead of your own needs.
While many parents choose to fund 100% of their children’s education, realize you may have to work longer or may not be able to retire completely. Other families, while they can afford to pay for a portion of college expenses, prefer their children to take on the responsibility of funding the cost by working part time, earning scholarships or taking out loans.
Current studies show that the average family has 38% of college costs covered by scholarships or other funding options such as loans or grants. We recommend first running a financial plan for yourself to ensure you are on track to meet your own goals for retirement before beginning to fund college expenses. Once you are able to invest money for future college expenses, you need to determine how much you are willing to fund out of pocket versus finance with loans, then research the most appropriate savings vehicle for your situation. You’ll want to consider how your savings will affect your child’s eligibility for scholarships, grants or loans.
How much you contribute may be an ongoing conversation as your child nears college, as you should also determine what amount of college debt would be reasonable. This may be dictated by the degree the child is earning. If your student will graduate with a degree that will lead to a high paying job, it may be OK to take on more debt, as your child should be able to afford to pay the loans. Likewise, you should also have a conversation with your child about the appropriate use of borrowed money. So many students are using loans to fund a lifestyle that includes plush apartments, spring break vacations and excessive meals out. The stories of the “poor, starving college student” are few and far between these days.
Not only is it important to save for college and your own retirement, but you also need to be aware of where you have your assets, as this determines how much financial aid is available to you or your student. Families should familiarize themselves with the Free Application for Federal Student Aid (FAFSA) form. It is an extensive form used to determine financial aid eligibility and the Expected Family Contribution (EFC).
In general, the formula assumes the following percentages are available to pay college expenses: 20% of a student’s assets; 50% of the student’s income, and on a sliding scale, based on income 2.6% to 5.6% of the parents’ assets and 22% to 47% of the parents’ income. Retirement accounts belonging to the parents or the child are excluded. Financial aid eligibility is then generally calculated as the cost of attendance minus resources from scholarships or direct payments made to the educational institution on behalf of the student, minus the expected family contribution.
A college education is a considerably large expense most families will face. Being prepared and knowledgeable with your savings choices will make a difference in your child’s future. If you’d like to know more about the savings vehicles that are most appropriate for your family, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
