First in a series
Just keep putting those dollars into the piggy bank when your child is a baby, and you should be fine for paying for college, right?
Maybe not, according to educational and financial advisors who know the ropes about investing wisely for a college education.
Buena Vista University Financial Aid Director Leae Valentine says parents often plan too late, if at all, in financing their children's education.
"They don't plan at all," Valentine said. The reason is just a financial inability to meet college expenses .
"They're worried about other expenses during their lifetime," Valentine said. One thing Valentine finds particularly distressing is when parents delay their own retirements to repay their children's school loans.
The process for applying for financial aid consists of parents submitting a Free Application for Federal Student Aid, Valentine said. Student and parent income are both considered, as is family size. Valentine said the U.S. Department of Education uses a formula to determine the expected family contribution which remains consistent, regardless of which college or university the student attends, Valentine said.
Different colleges have different percentages of financial aid available. Factors that determine how much is available include endowments and the individual expected family contribution for each student.
"We try to attract and recruit students of more need here. That's what we have in this part of the country," Valentine said.
In any case, parents should not rely on either the college or the federal government to cover the entire cost of college.
"We always tell parents to not rely 100 percent on financial assistance," Valentine said. "The days of a free ride are over."
However, there is still substantial financial aid available. Valentine said Buena Vista has $4.5 million in Iowa Tuition Grant funding and $3 million in PELL grant funding available. The Iowa Tuition Grant is available to Iowa residents attending private colleges or universities. Valentine said July 1 is the application deadline for the Iowa Tuition Grant and that 70 percent of Iowa students who apply at Buena Vista University receive the grant. Valentine said parents should submit their tax returns as soon as possible so they can include the required prior-year tax information and submit the FAFSA as soon as possible.
"College is still affordable," Valentine said.
Barbara Pytel of Storm Lake, a kindergarten through eighth-grade counselor at Clay Central Everly School and independent higher-education consultant, says traditional views about saving for one's child's college education may not be sound or adequate in offering the best investment.
The Section 529 savings plan can work, but only if propertly used, Pytel said. Under the plan, funds set aside in a 529 are tax free until withdrawn, provided withdrawals are used for education expenses. Pytel says that when the beneficiary receives the fund, is is taxed at that person's tax rate, not the rate of the owner.
If the prospective student would receive a bounty of scholarships and not need the funding, the fund can be transferred to another family member, including counsins, without penalty.
However, there is a 10 percent IRS penalty when funds are withdrawn, in addition to the current tax rate of the owner.
"I'm just not sold on it," Pytel said of Section 529. She says another option could be to put money directly into colleges. Funding is then frozen. The problem with that strategy is if the child should choose another college.
"What if your child gets a scholarship at another school" for instance, Pytel said. Then those funds could be sacrificed to the college, Pytel said.
"You do't put anything in the student's name," Pytel said. The reason for that is that every student can have no more than $1,400 in savings a year. The student is expected to contribute 35 percent of any amount over $1,400 toward his or her college, Pytel said. Parents, however, are expected to contribute only 5.6 percent of their savings, Pytel said.
Pytel said a tax-deferred annuity under the umbrella of a mutual fund insurance policy is preferable. She said life insurance is exempt from mandatory reporting on the Free Application For Federal Student Aid (FAFSA) form.
Grandparents err when they give high-school graduates a large lump sum when they graduate from high school, Pytel said. The student then has to claim that amount on the FAFSA form. The student will again be expected to contribute 35 percent of any gift toward his or her college the first year and any remaining amounts at the same rate for subsequent years, Pytel said.
She said it is better to give any large gifts as a college graduation gift to help pay off school loans which do not begin to acrue interest until nine months after the student graduates from college. "I think people would be better off to have money in a savings account and give it as a college graduate gift," Pytel said. The key thing parents need to remember, said Pytel, is that financial aid packages are always based on the prior year's income.
Another mistake that prospective college students make is delaying college to save money for higher-education expenses. Then they find themselves saddled with car payments and other expenses. The student's financial will also give the appearance that the student does not need financial aid. "It usually works against the kids to do that," Pytel said. "It's best to go to college right after high school.
"The best formula is high ACTs and low income," Pytel said. "The system is set up to help people who need help. You can't play the game if you don't know the rules."
Pytel noted that colleges want to help students in applying for financial aid. Unfortunately, parents seldom do the right thing as far as having their children qualify for the most financial aid for which they would otherwise be eligible if parents took a more sound financial strategy in saving for college. "The colleges all want to help you," Pytel said.
Another mistake parents make is assuming that their children can fill out the necessary forms to take care of their financial aid package. "The kids aren't interested because Mom and Dad are going to pay for college," Pytel said.
Early planning is the key to having a sound financial strategy for paying for higher education, Pytel said.
"You should really start planning in the sophomore year because what happens in the junior year affects financial aid," Pytel said.
Pytel is author of the book How To Send Your Child To the Right College And Save Thousands.