Might Be In Over My Head…Maybe?

Funding an Education www.wifemomhouseohmy.comIt seems to me that the first place to start with my series on getting a child to go to college is on funding an education. I think we can all agree, as parents, that this can be the most daunting part of a college education for our children. We have all heard of the rising cost of education. Recently, the nation’s education loan debt exceeded the nation’s credit card debt for the first time…ever! That’s right. Our country owes more for an education than we do on credit cards. I would hope this spoke for America’s attempt to reduce its unsecured spending but sadly it is a reflection of the need of loans to fund a college education and a sad fact of the skyrocketing costs of educations.

Let me start off by saying I am not a certified financial expert in funding a college education. What I am is a GREAT student and a parent of a teenager. What I am going to share is based on my own experiences funding my college education at a private university for a total cost of approximately $15,000. I am also going to share the knowledge that has been shared with me via experts – funding professionals, college financial aid counselors, college admittance counselors, and more.

When it comes to funding a college education, there are generally three ways to fund it – your money, someone else’s money and loans.

Your Money: Investing and Saving

General rule, start early. This is true for anything you really want to fund. In fact, when school’s calculate your financial aid and the support they will give, they do based on what they feel you should have saved (what you should contribute based on your overall net worth –  see FASFA). But you want to be smart in how you invest. For all of these below, seek a financial planner to assist you with determining the best for you and your family.

Savings Account and CDs

Most people start or want to start a savings account for their children’s college education. The intent is good but the rate of interest is not. Certificates of Deposit are not usually much better when it comes to interest and they lock your money in. That said, having a systematic savings plan for your child’s education is awesome. Compounding interest in a small account with a decent interest rate (3%) on a monthly $50 deposit can add up – $14,332.76 if done the month your child is born through turning 18. Downside, you do have to report this on the FASFA.

529 Plans

These are education savings plans either operated by the state or an educational institution and are designed to help families set aside money for their or their child’s future college costs. Technically, and depending on the limits of the plan, you can be a California resident with a 529 plan in Vermont and send your child to a North Carolina school. They operate similar to a 401K or investment account in that the funds you deposit are invested into mutual funds or similar. These must also be reported on your FAFSA.

UTMA or UGMA

The Uniform Transfer to Minors Act or Uniform Gift to Minors Act allows a trust to be set up for your child where a custodian or trustee is in place to act on their behalf. This is basically another way to save money for your child’s education, but it comes with some tax and financial aid implications. The money in their trust is treated as their money. Therefore it is taxed at their tax rate, not yours, BUT it is considered their money when it comes to financial aid and heavily impacts their ability to get financial aid.

Investment Grade Life Insurance

Yep, life insurance. The benefits here are plenty but you have to be wise and savvy to access them. It also takes time to build up the “equity” within them. The idea is simple. You overfund the life insurance that is an investing non-direct recognition whole life policy. You must make sure to not trigger the Modified Endowment Contract (this makes the IRS look at it differently) when you invest/fund the policy. You can take up to 90% out of the policy tax free but must leave at least 10% in the policy so it stays tax free. And in theory, with a non-direct recognition whole life policy your policy will still pay dividends on the full amount, so depending on the size of the loan, you may not have to pay it back. Plus, there is a death benefit to it. Even better, this is not counted on the FASFA. Downside, it does require a significant period of time to build the equity and you do have to pay the premiums. This is definitely one to talk to a financial advisor before going this route.

Someone Else’s Money

I am all about someone else spending money on what is bound to be my child’s enormous college education bill. And frankly so should you! Saving for college is daunting so getting free money is imperative.

Grants

This is free money you do not have to pay back and is often based on financial need. You do have to fill out the FASFA for the federal Pell Grant and for most state grants such as the Cal Grant and Middle Class Scholarship here in California.

Scholarships

Again, this is free cash for college. Scholarships come from a variety of sources such as national or local institutions, public entities, non-profits, foundations, and so on. They are also based on a variety of requirements such as academic merit, test scores, area of study, GPA, ethnicity, heritage, talents, special needs, volunteer and community service records and so much more. If your child is inventive, they can even create their own by partnering with a business. I know of one gentleman who contacted a business about giving him a scholarship if he could get it publicly recognized and covered by the local paper/media. He got the San Gabriel Times to publish the scholarship awarding, the business got publicity and he got a scholarship.

Most of these require separate applications, personal statements and letters of recommendation and have very strict deadlines. You can begin searching on www.fastweb.com or www.studentaid.ed.gov or www.finaid.org  to look for scholarships. Also, have your child check with their guidance counselor or college admission advisor at their school for local scholarship opportunities.

Endowments

Again, this is free money. Mostly offered at private schools and supplied by donors and often based on need and academic merit, they provide additional financial aid. I actually got the benefit of this by attending a private school. One way to be on top of their lists is to make sure you are above the merit mark. For example, the private university I attended offered an automatic merit scholarship for anyone entering with a 3.5 GPA. I had a 4.0 and they began courting me. Not only did I get the merit scholarship but a slew of other endowments, grants and scholarships. Looking at colleges where your child stands outs as an asset versus just another applicant, is a great way to start the path to free money.

Work-Studies Program

Work-study programs offer student campus employment opportunities. You can earn money through certain jobs to pay for an education. These are offered through the university and federal programs. Make sure to mark an interest on the FASFA and any state or educational institution application if available. Plus, it gives your child work experience they can add to their resume. I count these as someone else’s money because jobs on campus are usually reserved for students in work studies programs.

Sage Scholars My Tuition Rewards Program

Truly free money that only involves a little bit of effort. A consortium of about 340 plus private universities has started a program where you can earn free money to attend one of their colleges. Your child can earn Tuition Rewards Points and they are a Tuition Assistance Guarantee that represents a dollar for point minimum scholarship/grant/financial aid that your child receives at one of the schools. Cool, right! They can get additional financial aid but this represents their minimum aid. You can accumulate points for all your children and use them for any of them as long as they attend one of the 345 plus schools. You can enroll in the program at any time BEFORE August 31 of your child’s 11th grade year and you can enroll the day they are born.

The maximum reward possible varies by college but is currently over $45,000! That ain’t chump change in my book. To learn more and to enroll, check out My Tuition Rewards. My stepson is unfortunately not looking at any of the 345 plus colleges but you can bet I will be signing up any additional children my husband and I have.

Loans

Obviously, we do not want to send our children into the adult world strapped in burdensome debt. But loans do have a place in our talk of funding a college education and they can be a valuable tool to do so. They just need to be utilized properly. My general philosophy when it comes to loans for college is pretty simple. The benefit must outweigh the cost. A college loan is an investment in your child’s future. But be smart.

Student loans are generally paid over 10 years. So if you have a $100,000 in loans, then that’s $10,000 a year due plus interest! That said, if $100,000 in loans gets you a $100,000 a year starting salary, then that’s a good investment. Considering the average workspan is about 43 years at $100,000 minimum a year, that’s a total payout of $4,300,000 for the $100,000 loan. Not bad. Plus, at $100,000 starting salary, your child could relatively easily pay off the loan with little burden in 10 years.

But a $100,000 in loans for a starting salary of $25,000 is not a good idea in my book. A $10,000 plus annual pay back rate would definitely be burdensome to your child. And while, the $1,075,000 is not a bad return on $100,000 investment, its still not wise. Unfortunately a lot of people use loans this way. And our children are strapped with heavy debt.

I’ll use my personal case as an example of a good use of loans. My total 4 year college education cost $15,000 approximately between my single mother and me. That was all loans. The education I got was a $30,000 plus a semester education. The bachelor’s of science, the college education and the job experience as result of an internship I got while in college afforded me a career path that at 27 I was offered a job with an $80,000 salary and perks! Not a bad investment. Bottom line – be smart when it comes to loans.

There are many types of loans out there. Here is a general overview of some of them.

PLUS Loan

Parent Loan for Undergraduate Students is a part of the federal direct loan program and allows parents to take out a loan to cover the cost of the difference in their student’s financial aid package and their tuition costs. These loans are the responsibility of the parent. Their payments come due 60 days after funding and generally have terms up to 10 years. There is no cumulative limit so a parent can get new loans as needed to fund their child’s education. Again, BE SMART!

Federal Perkins Loans

These loans are given to those with exceptional financial need. They are subsidized and have low interest rates (currently 5%). These are the responsibility of the student. There is no interest charged while the student is in school at least half-time and they come with a 9 month grace period after graduation/leaving school before repayment begins. This is also a part of the Federal Loan Program.

Subsidized Stafford Loan

For students that meet federal guidelines for “demonstrated financial need”, they can get subsidized loans. Like the Federal Perkins Loans, there is no interest charged while an undergrad is enrolled at least half-time. Additionally, it comes with a deferred payment period post graduation.

Unsubsidized Stafford Loan

Unlike any other federal loan, this loan is not based on need and does not require the FASFA to determine need. (Though you do need to fill out a FASFA to apply for this loan.) Any student can apply for an unsubsidized loan. However, a major difference between a subsidized and unsubsidized loan is the later accrues interest while the your child attends school, though it can have a deferment period for payment post graduation. This is a student loan and is the responsibility of the student. The college or university generally determines how much you can borrow based on attendance and financial aid received.

Private Education Loans

Sometimes called Alternative Education Loans, these often come at higher interests and poorer terms than federal loans. This is mostly because they are through private lenders. It is most definitely suggested that you exhaust all federal loans and funding before seeking a private education loan.

Regardless of how we fund our child’s education, and all likelihood it will be some combination of the above, the fact of the matter is college is expensive. The best strategies always involve starting early so the impact of the cost will be as minimal as possible. I hope these different avenues of funding an education has helped give you options for planning on how to fund your child’s education. Another great resource to check out that can give you even more information on funding an education is FinAid: The Smart Student Guide to Financial Aid.

Until next post!

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