The need for college planning has never been more important.
The average cost for a private school is now $35,676 and the rates on Stafford and Parent Plus loans for 2019 have increased to 5.05% and 7.6% respectively.
For parents with children in high school, this poses a serious question. What is our best “Late Stage” planning strategy to pay for college without jeopardizing our own retirement? Here are some tips to consider:
It’s never too late to start, even if your children are entering or in high school. Your best option is with one of two types of 529 accounts:
529 SAVINGS PLANS
These are state-sponsored savings vehicles that allow assets to grow tax-free. Distributions are also tax-free as long as they’re used for qualified educational expenses. Plan beneficiaries can be changed and the impact on financial aid is minimal. This makes them ideal “late-stage” savings vehicles.
Each state offers different investment options and some provide tax deductions for contributions. You will need to research your options or work with a financial advisor who specializes in college planning to determine the ideal plan fit and investment allocation.
529 PREPAID PLANS
Prepaid plans allow you to contribute funds that buy future tuition at current rates. They are offered by some states and also through the Private 529 Plan which is sponsored by over 300 private schools.
Unlike savings plans in which the chosen investments might lose value, prepaid plans shift the risk to the sponsoring entity. There are no fees and there is zero market risk. These plans make sense for families wanting a guaranteed return on their investment. They can also be combined with 529 savings plans for a more diversified savings strategy.
One of the primary focusses of your college plan should be finding schools where your child will fit in best and graduate on time. Factors to consider are the size of the campus, its proximity to home, school curriculum, the relative competitiveness of the student body, class sizes, and social activities, such as fraternities and athletics. The key here is “check the boxes” off for a small number of schools that meet the profile of your child.
Once you’ve narrowed your search down to six to eight schools you can then focus on financial aid. Yes, the schools you select will to a large extent determine your eligibility for merit based financial aid. Your goal should be to position your child in the top 20%, from a grade and test perspective, of the incoming freshmen class. This will not only increase your chances of admission but also put you in a stronger position to receive financial aid in the form of grants and scholarships. If you receive a better financial package from a school other than your primary choice, you may be able to use that award as a negotiation tool.
Consider the tax benefits of shifting appreciated assets, such as stocks, to your child. Your child can potentially sell the assets in his or her name to help pay for college and pay taxes at a lower rate. Make sure that the additional income won’t impact need-based aid eligibility and that it properly navigates the “Kiddie tax“.
Do you have your own business? If so then hiring your child may provide tax benefits as well as business experience. The work must be tied to the business and the wages must be reasonable. One strategy would be to pay your child up to their standard deduction ($12,200 for 2019). They will not owe any income taxes, you deduct the salary and can use the proceeds towards the cost of college. If your child is under the age of 18 then you can avoid paying Social Security, Medicare and unemployment taxes, unless your business is incorporated. Income in your child’s name can negatively impact need-based financial aid eligibility, so you’ll need to determine before-hand if you will qualify for need-based financial aid.
Your children will have far more options to pay for college then you will have to fund your retirement. Far too often families will mortgage their home, take out loans, access their retirement accounts or use their savings to pay for their child’s education. These actions can have serious implications on achieving your own goals. Developing a balanced college plan that incorporates saving and “late stage” payment strategies should help protect your own assets and help your children graduate with minimal student loans.