College

2
Oct

Estimating College Costs

College CostsBefore diving into college costs and how to estimate them, we’d be remiss in not announcing that IT’S FAFSA TIME! Starting October 1, you are able to fill out and submit your FAFSA. As we mention in our workshops and discuss with our families, financial aid is a first come, first serve bucket of money. The sooner you get your forms in, the better chance you stand of being awarded fairly. This is particularly true of families with exceptional need who may qualify for the Pell Grant and/or the Federal Supplemental Educational Opportunity Grant.

Even if you do not except need-based financial aid, the FAFSA is required in order to receive the Federal Direct Loan For Students – arguably the most favorable student loan available – and is also a requirement to be eligible for many merit-based grants and scholarships offered directly by schools. There simply is no reason NOT to submit the FAFSA.

In fact, if you’re the parent of a high school senior, stop reading right now. Go submit your FAFSA and come back. This blog post isn’t going anywhere.

…waiting…

…done yet? Great! On with the article!

What is the forecast for college cost increases?

You’ve seen the numbers — a college education is expensive. All those benefits of personal growth, expanded horizons, and increased lifetime earning power come at a price, a price that increases every year. According to the College Board’s annual Trends in College Pricing Report, for the 2017/2018 academic year, the average cost of attendance at a four-year public college for in-state students is $25,290, the average cost of attendance at a four-year public college for out-of-state students is $40,940, and the average cost of attendance at a four-year private college is $50,900. Many private colleges cost substantially more.

For decades, college costs have outpaced annual inflation, and this trend is expected to continue. Annual college cost increases in the range of 3% to 6% would be a reasonable projection based on historical averages.

The following table shows what college costs might be in 5 or 10 years based on current costs and a 5% annual college inflation rate.

Year Public Private
2017/2018 $25,290 $50,900
2018/2019 $26,554 $53,445
2019/2020 $27,882 $56,117
2020/2021 $29,276 $58,923
2021/2022 $30,740 $61,869
2022/2023 $32,277 $64,962
2023/2024 $33,891 $68,210
2024/2025 $35,585 $71,621
2025/2026 $37,364 $75,202
2026/2027 $39,233 $78,962
2027/2028 $41,194 $82,910

What expenses are included in the cost of college?

In the academic world, the cost of college is generally referred to as the cost of attendance (COA). Each college has its own COA. The COA consists of five items:

  • Tuition and fees: These expenses are generally the same for all students.
  • Books and supplies: These expenses can vary depending on the courses selected.
  • Room and board: These expenses can vary depending on where the student lives (e.g., dorm, off-campus apartment, at home) and the meal plan chosen.
  • Transportation: This expense can vary depending on how far the student lives from the college. It can involve daily commuting expenses, three round-trip flights home a year, or anything in between.
  • Personal expenses: This category varies greatly among students. It can include telephone bills, health insurance, late-night pizzas, personal spending money, or even day-care bills.

Twice per year, the federal government recalculates the COA for each college and then adjusts the figures for inflation. The government then uses the COA figures to determine your child’s particular financial need come financial aid time.

Why you should start saving early

Next to buying a home, a college education is the largest expenditure most parents will ever make (and perhaps the biggest expenditure when more than one child is in the family picture). Faced with such a daunting task, you might be inclined to ignore the problem and wait until you are more financially settled before you start saving. But that would be a mistake.

The key to sanity in the area of education planning is advance planning. The earlier in the process you become informed about the potential costs and your saving options, the greater chance you will start saving. And the more money you save now, the less money you or your child will need to borrow later.

It is important to begin saving as early as possible so you can earn interest, dividends, and/or capital gains on as much money as possible. With a long-term savings strategy, you can hopefully keep ahead of college inflation.

Regular investments add up over time. By investing even a small amount of money on a regular basis, you have the potential to accumulate a significant amount in your child’s college fund. The following table illustrates how your monthly investment can grow over time (assuming an approximate 6 percent after-tax return rate):

Monthly investment

5 years

10 years

15 years

$100

$6, 977

$16,388

$29,082

$300

$20,931

$49,164

$87,246

$500

$34,885

$81,940

$145,409

Note: The above example is for illustrative purposes only and does not represent the return of any investment. There is no guarantee that your investment will realize a return and there is a risk that you will lose your investment entirely.

How much do you need to save?

How much you need to save obviously depends on the estimated cost of college at the time your child is ready to attend. Often, these numbers are staggering. For many parents, the question of how much they should save becomes how much they can afford to save.

To determine how much you can afford to save for your child’s college each month, you will need to prepare a budget and examine your monthly income and expenses. Don’t be discouraged if you can save only a minimal amount at first. The key is to start saving early and consistently, and to add to it whenever you can from raises, bonuses, or unexpected gifts.

After you determine how much you can save each month, you will need to choose one or more college saving options. There are many possibilities for college savings–529 plans, Coverdell education savings accounts, custodial accounts, bank accounts, and mutual funds. To help make your nest egg grow, you will want to maximize the after-tax return on your savings while minimizing risk.

Finally, keep in mind that most parents are not able to save 100 percent of their child’s college education (after all, do you know anybody who purchased a home entirely with his or her own savings?). Instead, parents generally supplement their savings at college time with a combination of personal loans, financial aid (student loans, grants, scholarships, and work-study), and tax credits to cover college costs.

18
Sep

Free College Planning Workshop

Are You Ready To Take Control Of College Costs?

SeaCure Advisors is presenting a FREE college planning workshop Thursday, September 27th, at 6:30pm at the Lexington Public Library – Beaumont Branch, open to parents of high school sophomores, juniors, and seniors.

The workshop will focus on financial aid – where it comes from, who qualifies for it, how to maximize it, and how to avoid the critical mistakes people make that can wind up costing them thousands of dollars in unnecessary expenses during the college years.

Space is limited and the workshop fills up fast, so RSVP now to make sure seat is reserved!

We look forward to seeing you there!

4
Sep

Using Savings and Investments To Pay For College

If you have savings and/or investments on which to draw, you might consider using these funds to pay your child’s private school or college tuition bills as they come due.

Savings

A savings account can be a typical saving account at a bank or a money market account. There are several advantages to paying education bills from your savings.

First, withdrawing from your savings account is simple. For one thing, no independent approvals are necessary (except perhaps from your spouse). You simply go to the bank and withdraw as much money as you like. In addition, there are no tax implications or penalties associated with such withdrawals, so you won’t have to worry about complicated tax calculations come tax time.

Second, savings accounts generally earn the lowest rate of return as compared to other investments, so you don’t have to worry about missing out on high returns. This is referred to as a low opportunity cost.

Third, if you have enough savings, you can avoid tapping into your retirement accounts, something most planners recommend avoiding if possible. Similarly, the more savings you use, the less money you (or your child, if college age) will need to borrow. Borrowing increases the cost of private school or college because you must pay back the principal and accrued interest. By contrast, when you use your savings to make education payments, you avoid interest payments.

The disadvantage of using your savings is that the more funds you deplete, the less available money you will have for emergencies. It is generally recommended that you keep at least three to six months of your salary in savings account for emergencies. In addition, using a large portion of your savings to pay education bills may mean postponing other purchases like a new car or furniture.

Investments

Investments can include more common items like stocks, bonds, and mutual funds or more obscure items like real estate investment trusts and precious metals. Liquidating your investments (i.e., converting them to cash) is also a good way to pay current education bills. Most investments are easily liquidated (though it may take a few days to get your check in the mail or to have funds transferred to your checking account) and do not require an application or other approval.

However, liquidating investments is a bit more complicated than simply withdrawing from your savings account. First, if you have several different investments, you need to choose which investment(s) you want to liquidate. Factors you should consider here are the rate of return that each investment is earning, your asset allocation, the prospects for each investment in the coming year, and which investment will generate the most capital gain (or loss) if sold. Your financial planner can help you determine which investments may offer the best benefits if liquidated.

In addition, liquidating investments can mean a small headache come tax time. When you do sell an asset, make sure to keep track of the number of shares sold (if appropriate), how long you have held the asset (if the asset sold was a capital asset, then any holding period over 12 months will result in long-term capital gain), your tax basis, the sale price, your profit (or loss), and any accompanying paperwork so that you can properly document the transaction on your tax return.

In some instances, parents may choose to gift an asset (such as stock) to their child and have the child sell it. The benefit is that the child generally pays capital gain tax at a lower rate.

How can you increase your savings and/or investments?

Some parents may not have sufficient funds in their savings account today (for example, when their child is a college freshman) but would like to build up their reserves to pay education bills a couple of years down the road. If so, this money needs to be accumulated gradually through savings.

Systematic saving is a structured method of accumulating money in which you save by “paying yourself first.” This means setting aside something from each paycheck as soon as you get it rather than saving whatever is left at the end of the month. You must stick to your savings plan to make it work, and you may have to make sacrifices in other areas, but systematic savings can be an excellent way to boost your savings account so that you have a reserve of funds to pay tuition bills in future years.

The first step is to determine how much money you can save out of each paycheck. If your employer offers payroll deduction, you may want to consider this option because it is less difficult to part with money that is taken directly from your paycheck. As you accumulate money for education bills, you may want to place your savings in an investment vehicle that protects the principal. Because of the relatively short-term nature of your goal (i.e., less than five years), the stock market may not be an appropriate choice. Instead, you may want to consider a savings account, a money market fund or a certificate of deposit timed to mature when you are ready to pay a tuition bill.

How do you know if this strategy is right for you?

Most parents probably draw off their savings and/or investments at one time or another to pay their child’s private school or college bills. So the real question is probably how much of your savings and/or investments you should expend.

The answer depends on several factors, primarily the amount of your savings, your expected income needs in the next couple of years, your expectations about maintaining your current lifestyle, your monthly expenses and emergency fund requirements, and the current cost of borrowing. For example, if you want to retain the comfortable lifestyle to which you are accustomed (i.e., nice vacations, new cars), then you will need to leave a bigger savings cushion than if you are willing to budget for a few years. As for budgeting, in addition to accounting for regular monthly expenses (e.g., car payments or their own student loans), parents must also try to anticipate other one-time expenses, such as braces for Junior or a new roof for the house.

Other factors that parents of college-bound children may want to consider are how much (if any) they expect their children to contribute to college costs. Some parents expect their children to take out student loans in order to have a greater stake in their education. If so, parents can use less of their own savings. In addition, parents may want to estimate the amount of financial aid their child will receive (if any) in the upcoming year. If your child wins a scholarship in his sophomore year that will cover part of the following year’s costs, you can adjust any withdrawals from savings and/or investments accordingly.