In recent years, stories of young people graduating college with a mountain of debt and degrees, often in professions that make paying off that debt a challenge, have become common. Certainly, this debt was taken on with all good intent, but perhaps not enough thought as to how the obligations will be paid off. Unlike credit card debt or mortgages, current bankruptcy law does not allow the student, or co-signing parent, to get out from under their obligation by declaring bankruptcy.
Planning and saving for college expenses by parents, grandparents and students themselves can go a long way toward reducing the burden of debt payments after the college experience is over and the youth is now, hopefully, in the workforce.
We have three learning objectives for this post:
- To learn about educational saving and investing programs that can reduce the dependency on debt
- Review other options, other than debt, for college funding
- Explore educational options that may be less expensive than the traditional four-year college experience to keep debt low and may result in higher income
There are several ways to save and invest for your child’s or grandchild’s secondary education other than just investing in your own account and then shelling out the money at admissions time. Each of these types has some distinct advantages as well as limitations.
Prepaid Tuition Programs – Most states offer prepaid tuition plans. In these plans, you indicate how many years of college you want to plan for, whether you want room & board to be covered by the plan, as well as to cover the usual “local fees” that cover various other expenses.
The benefit of the state-sponsored tuition plans is that there is a “promise” from the state that the amount you pay into the plan will cover the future costs. The advantage here is that if costs rise more than you expect, you should still be covered. Starting these plans when the future student is an infant reduces the total costs that have to be paid in to the plan.
The disadvantage of the prepaid tuition plans is that if the child you invested for doesn’t go to college, or earns a scholarship that covers the costs, you will only get back your original investment in the plan. No growth on your money will be paid back to you. The plans usually need to be used by the student the plan is set up for. These are not transferable to another student.
529 College Savings Plans – 529 Plans are also offered by most states as well as many major mutual funds or brokerage firms. These plans can be used by themselves or in conjunction with a state-sponsored prepaid tuition plan. Contributions into a 529 Plan are owned by the account owner, usually a parent or grandparent, with a future student named as a beneficiary. Unlike prepaid plans, the beneficiary can be changed, so if one student doesn’t go to college, another person, even a parent, can be named as the beneficiary. Talk about a “back-to-school” experience!
Contributions to 529s are not tax deductible but provide tax deferred growth of the investments up until the assets are withdrawn to pay for educational expenses. If the money is used for qualifying educational expenses, the withdrawals from the plan are not taxed. With the flexibility of naming new beneficiaries, the plan can pass from one generation to the next if not needed for the original beneficiary’s expenses.
Funding Options – I encourage all parents and students who’s finances would be stressed by paying for college expenses to take the time, and it will take time, to investigate financial aid and grant resources. Some of these are based on achievement and others on need.
A great first step is to visit with the high school guidance or college placement counselors, if available at your school. They are a good resource for locating the appropriate websites and programs your child may be eligible for.
For an example of a merit-based system, in our home state of Florida, funds are made available to resident high school students who graduate with a grad point average of 3.0 or higher. There are two levels of the Bright Futures program, with the higher award based on meeting a higher GPA threshold.
The federal government also provides grants based on financial need. This is generally based off the parents income level, with students of higher income families not being eligible. The most popular of these is the Pell Grant, but there are other programs in which participation is based on other factors.
Another resource for your student may be available depending on their field of study. Many organizations and associations offer scholarship support for study and merit in certain fields to help promote that organization’s objectives. These are usually smaller scholarships and grants, but every bit helps keep the college debt lower.
Other Options – I think most of us envision a four-year college education in our kids’ futures. After all, the statistics about average compensation for college graduates and unemployment rates compared to a high school diploma are compelling. But, not everyone is cut out to make an expensive college education worth taking on a large amount of debt for them or you.
I speak from personal experience with my daughter, for whom the traditional college experience turned out to not be a good fit. After a break from formal education, she decided to focus on a dedicated certificate program at our local technical college. In these programs, students focus 100% on courses dedicated to their future craft. Yes, it’s not the fully rounded education we originally envisioned for her, but we have never seen her so happy. And, I think she will have plenty of opportunity to earn a good salary, even on par with some graduating with a four-year degree in certain fields. Plus, she can always pursue a more advanced degree later if she chooses.
In other words, there is no doubt the advanced education is important, but it is hard for young people to figure it all out as they enter college. For some, a more direct route to training for their chosen profession may be a good way to go at a much lower cost than the traditional college experience that may require accumulating a lot of debt.
To have a discussion about planning for college expenses, call us at (941) 778-1900 or visit www.integracapitaladvisors.com to set an appointment.