Wow, it was just yesterday that your child was a baby and friends and relatives were congratulating you on such a happy and darling child. You could envision her playing soccer and little league, and being the star at science camp. Or perhaps he’d attend basketball camp, play the drums, and be the local DJ at 14 years old.
Before too much time passes, let’s think about some items that parents and students can address sooner rather than later. Here are five financial action steps to take to get ready for college.
1. Start saving
529 accounts are tax-advantaged investment accounts for higher education. These plans are usually sponsored by states in conjunction with mutual fund providers. However, you do not have to use your state’s plan. And the funds can be used domestically anywhere in the US for higher education. Do the research and find the right plan for your family — the key variables: annual fee, fees embedded in the mutual funds, and the amount of the initial investment (many times as low as $25!). 529 savings plans are similar to 401k and IRAs. You can make regular (weekly, monthly) contributions to mutual funds. The goal is that with consistent savings and long-term market appreciation, your child will have a healthy college savings account.
2. Know the costs of college
College costs are real and daunting. To give some idea of the costs, all colleges and universities are required to have net price calculators on their websites. These calculators, in addition to providing average costs for all students after financial aid, are interactive and allow students and parents to input specific information. The calculator will then estimate the cost for the family. Want to compare schools side-by-side? Go to websites like College Abacus for estimates.
3. Fill out the Free Application for Federal Student Aid (FAFSA)
Many families feel that they should not complete this form, especially if they have the resources to pay for their children’s education. These families think that they will never qualify for financial aid. Well, income is only one of seven factors used to determine financial-aid eligibility. It’s tedious, but go online and take the time to complete the application.
4. Involve your child in financial preparations
Your child can begin in her or his junior year of high school looking for appropriate scholarships. The key is to be diligent and think creatively — major, race, ethnicity, hobbies, geography (where you currently live or where you’d like to live). There is a great app, Scholly, that helps students search for scholarships. What about jobs? Yes, if students have income, this does factor into the financial aid calculation. A great way to handle income is to have your child open a Roth IRA instead of a savings account. Why is this important? Assets in a retirement accounts are not considered in the financial aid application process. A win-win.
5. Keep paying yourself first
Often there is conflict between saving for retirement and saving for your child’s college. If your company offers a match on retirement saving, do not pass it up. This is free money. Secondly, assets in your retirement account do not affect your child’s prospects for federal financial aid, unless you take a distribution, which is classified as income. The same is true for life insurance and annuities. Note: employer retirement accounts, such as 401ks and 403bs, should not be considered emergency assets. However, you can use your IRA to pay for school costs, with some caveats per the IRS.