The ABCs of College Planning

The ABCs of College Planning

March 30, 2022

Let’s face it; college is expensive. The average in-state public school costs students over $27k per year, a number that is totaling tuition and fees, room and board, books and supplies, and transportation and personal expenses. If your kid wants to go out of state or to a private school, the cost is significantly higher.   

For parents and grandparents who are helping kids out, the earlier you start planning for those expenses, the better. Even if you’ve procrastinated, though, there are still funding options.   

Sorting through the process, from 529 plans to taking out loans, to financial aid from the government or the college, to scholarships, can be confusing with so many options. Taking a step back, looking at the big picture, and then breaking it down into a series of decisions and action steps can reduce stress and help you manage costs.  

Lowering Your Costs 

The government loves acronyms, don’t they? If college is around the corner, the first thing to help reduce the cost is to submit the Free Application for Federal Student Aid (FAFSA). You should submit it even if you don’t think you’ll qualify for need-based financial aid. FAFSA also qualifies students to receive grants, student loans, and other financial aid.  

Applying for scholarships is another way to lower college costs. There are scholarship websites students can use and apply to while they’re still in high school. Local businesses may offer scholarships to recent grads, and colleges typically offer academic and athletic scholarships. The point is there are many options available. It takes time and effort from the student, but doesn’t everything worthwhile? 

While a degree from a top-tier school does have its advantages in terms of networking, resume value, and recruiting in the workforce, it’s not entirely necessary. Successful people come from all walks of life. The school’s costs should be considered in the student’s selection process.   

Should You Supplement with Student Loans?  

The staggering amount of student debt and its impacts on people starting their financial journey are profound. Going to college debt-free is ideal, but it is not realistic for many. When used to supplement other sources of funding, student loans can take the pressure off both parents and children. I also believe that when a student signs a dotted line and becomes financially on the hook for their degree, extra skin in the game helps them take college more seriously.   

Broadly speaking, there are two ways to get loans. Federal loans generally provide lower interest rates than private loans and can be paused by the government, as we’ve seen throughout the pandemic. Private loans are issued by organizations such as banks or credit unions and typically have variable interest rates. Federal loans are generally the preferred option over private loans as payment periods are more borrower-friendly. Lower interest rates can save money over the loan length. 

Remember, children can finance the cost of college. Unfortunately for parents and grandparents, there are no ways to finance the cost of retirement.   

To Save or to Invest? 

So far, we’ve talked about options to fund college when that next step is on the cusp. If you have some time to plan ahead, there are a few great ways to save.   

One option is through a 529 savings plan. These plans allow you to put money away for college, invest the funds for growth, and if the funds are used for qualified education expenses, the withdrawals are not subject to federal income tax. This means the account can grow tax-free. Some states may also provide state income tax deductions, but there is no extra benefit here as we have no state income tax in Florida.    

 Another option would be to save into a prepaid college plan, such as the Florida 529 Prepaid plan (yes, prepaid plans are types of 529s, but they obviously differ from 529 savings plans). State prepaid plans generally lock in future tuition costs at today’s prices. Each plan is different, but there are many ways to design it to fit around whatever your budget may be for Florida residents. You have a set payment plan for what you would like to fund, and that payment is guaranteed to cover that cost, regardless of how they change in the future.   

You can also use general savings and investment accounts to plan for college. This may give more flexibility in terms of use and investment options, but you do not receive the same tax benefits.    

The Takeaway 

There’s a lot to think about when it comes to paying for college. There are many variables to consider, but the most important thing is recognizing the need for planning and taking action ahead of time. Being proactive is much less stressful than being reactive, especially regarding money and savings. By laying out your options, weighing the pros and cons, and taking your financial situation into account, you can begin to build a college funding plan that meets your needs. 

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