Finding Ways to Save for College

By  Kate Welker, CFP®

It is again the back to school season. Preschool through college school will look different for students this year, but one thing is the same. The changing of the year, feeling of a fresh start, and thinking about the future year ahead. For older students we are discussing college plans and for those of you with young children you may be thinking about planning for your children's eventual college. With a growing student loan debt load in this country how to pay for college is a concern we like to address. I wanted to share some thoughts on a few unique ways to think about saving for education.

Childcare Expenses- If you are paying for daycare or after school programs this is a large expense you are already budgeting for and handling with your current income. Once your children are old enough to not need that expense, convert it and start putting that same amount into their college savings. Depending on the age of children and area you live most people are paying between $8,000 and $15,000 a year for daycare. As that number decreases and then goes away that is a large amount to be contributing each year. 

Side hustle- I've had a few friends recently start a small business on the side and nickname them "college fund" jobs. They are committing to putting all of the earnings from this new venture into college savings. 

Scholarships- This is a huge opportunity for your student to start earning funds for their education. This takes time and diligence on their part, but starting in their freshman year have them look for these opportunities. Have them search out competitions that focus around their strengths such as writing, debate, or technology.

Saving on College- Combined with saving for college consider ways to save ON college expenses. Being aware in advance of the full expenses of an institution along with the scholarship and aid available should make a major impact on your choice of where to attend. If there are scholarships available for a particular GPA or test score that is a goal to work towards. 

There are many other creative ways to fund that education goal. We enjoy working with our clients to find their solution. Once your child is in high school (9th grade is not too early!) we offer college planning services and in depth analysis that will compare college costs, grants available, and the total net cost. Contact us for a consultation! 

The Pandemic Has Changed How Parents Save for College - Here’s How to Get Back on Track

By: Ann Arceo

As parents, we want what’s best for our kids and education is top of the list for many of us. Of course we had no way of knowing that this year would disrupt and change so many of our plans. From an economic downturn to school closures, 2020 is a year we won’t soon forget. As we’ve scrambled to adjust our family routine to make this school year work, it can be easy to put off planning for a future goal like college that’s years down the road. 

If you can relate to that feeling, you’re not alone. A recent CNBC article highlighted a survey showing “16% of parents saving for college paused their contributions” while 13% reduced contributions and 17% planned to withdraw funds” because of financial concerns due to the pandemic. Worrying about your finances during this time is certainly understandable, but the one rule parents should keep in mind when saving for college or any major financial goal is that time is one of your biggest assets. By starting early, you’ll ultimately need to save less given that your money will have time to grow. So if you’ve started saving and stopped or even if you haven’t started saving at all, the 4 steps below can help you make a plan and get on track. 

Set up a 529 Plan 

A 529 Plan is a college savings account that offers special tax benefits. You contribute to the account with after-tax money. As the account grows, earnings are tax deferred and withdrawals are tax free as long as you use the account to pay for qualified expenses related to education. Each state offers their own 529 plan, but that doesn’t mean you’re limited to your state’s plan. 35 states offer an income tax deduction or tax credit for residents who contribute to the state’s plan. You should consider not only the state income tax deduction but also the fees that the plan charges as high fees can hurt the growth of your savings. 

Most plans make it easy to invest the money you contribute by offering age-based investment options that will automatically become more conservative as your child nears college age. There are several other features that make 529 plans an attractive option such as the fact that there is no age limit for using the money in your account so it could be applied to graduate school if your child continues their education. 

The drawback of a 529 plan is that in order to avoid taxes and penalties the funds must be used for qualified expenses. If your child decides not to go to college you can change the beneficiary on the account making the funds available to a sibling. Also, taxes and penalties will only apply to the growth on your account, not the principle balance. For example, if you contribute $10,000 to a 529 plan and it grows to $12,000 then you have $2,000 in earnings on the account which could be taxed and penalized if the funds are used for something other than qualified college expenses. 

Start Early & Make Saving Automatic

There is no denying that college is expensive, and that doesn’t seem likely to change anytime soon. It can feel overwhelming to think of saving thousands of dollars, but if helping your child pay for school is a goal on your list then starting early and saving consistently can make a big difference. As a mom of a 2 and 4 year old, I get how hectic life with little ones can be. Try to set aside a little time to establish your child’s 529 plan and set up an automatic contribution and investment. For example, you could set up a $50 monthly contribution (more or less depending on your goal and budget) that automatically pulls from your checking account, goes into the 529 plan, and is then invested in the age based investment option. You could increase the contribution amount each year as your income grows. This will make saving easy and automatic and before you know it you’ll be well on your way to funding your child’s education. 

Don’t Let Your College Savings Fund Become Your Emergency Fund 

No parent who has worked hard to establish a college savings fund for their child wants to dip into that fund to pay for an unexpected expense. In order to avoid that scenario, It’s important to prioritize saving for an emergency on top of building a college savings account. Be realistic about your budget and what you can afford to save for college. Paying down high interest debt, building a solid cash cushion, and saving for retirement should also be priorities. 

Set a Goal & Review it Regularly 

Saying that you’d like to pay for your child’s education is a wonderful dream, but if that dream is ever going to come to fruition then you need an actionable plan. There are several online college savings calculators like this one from SavingForCollege.com (https://www.savingforcollege.com/calculators/college-savings-calculator) that can help you set a savings goal and research 529 plans. 

Here at Rooted Planning Group, we also work with clients to help them with college planning from setting up an account, to selecting investments, to determining how much you should save. Whether you’re in the newborn days of parenting or navigating the teenage years, we can help you build a plan that will work for you and your family to make your financial goals a reality. 

About Ann Arceo: Ann Arceo has been working in the financial planning industry for over 10 years. She began her career in financial planning at PartnersInWealth, a wealth management firm based in Houston, Texas, which caters to high net worth clientele. She worked with the firm’s president to develop a new method of training to help advisors learn to deliver technical financial plans in an easy, "plain English" format that clients would understand.

​She then worked for LPL Financial, an independent broker dealer, where she earned her Series 7 & 66 securities licenses. She worked alongside a branch manager creating financial plans, account summaries, and investment performance reports for high net worth clients.

Ann also has a passion for writing, and her financial articles have been featured on Investopedia.com, a website which has 20 million unique visitors per month. She has also written for ReadyForZero.com, BudgetTracker.com, and has been quoted in articles for Forbes and U.S. News & World Report.
 
Ann holds a bachelor’s degree in Business Management from the University of Houston, Victoria. She lives with her husband and two children in Fort Collins, CO. They enjoy spending time with friends, hiking, and of course planning their financial future together.

SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019

At the very end of 2019 the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed into law.  It gave this weeks blog author and Financial Planner, Amy Irvine, CFP®, EA, MPAS®, CCFC, flashbacks to the 2017 tax law changes that happened at the very end of that year too. There are a lot of little nuggets in this Act, below is our interpretation of the Good, the Bad, and the Weird …

The Good

• If you are turning under the age of 70½ this year, you can now push the required minimum distribution down the road.  The new age is now 72.

• Beginning this year (2020), if you continue to work past the age of 72 (was 70.5), you can now make a contribution to your Traditional IRA.  Prior to this Act, even if you had earned income, you couldn’t contribute once you reached the “magic” age.

• This does not change the Qualified Charitable Distribution age though, that is still 70½ 

• If you receive a stipend or fellowship, that is now considered qualifying income for an IRA (or Roth IRA) Contribution.

• Small businesses will be able to join a pooled employer plan (called a MEP or Multiple Employer Plan), which is meant to reduce the cost to small employers  And if the employer plan has an automatic enrollment feature, they get a small tax credit.

• If you are a volunteer firefighter or EMC, then you will have a one-year repeal of the SALT limit on your federal tax return.  Remember SALT stands for State and Local Tax.

• If you are planning on having a baby, or adopting a child, in 2020 you can now take a $5,000 distribution from your retirement plan WITHOUT penalty.  Of course you have to pay tax on it, but if you redeposit it within 60-days of withdrawing it, then it would not be considered taxable.

• We are thrilled that you can now withdraw up to $10,000 during your lifetime from a 529 plan to repay student loans WITHOUT tax or penalty.

The Bad

• If you turned 70½ in 2019 but elected to defer the RMD until 2020, sorry, but you still have to take it before April 1, 2020.  Also, only those that turn 70½ in 2020 can defer until age 72. If you’re 71, sorry, but you still have to take yours.

• Stretch IRA’s won’t be able to stretch as far in the future.  Historically, your beneficiaries have been able to elect to take the remainder of your IRA over their life expectancy.  That has been nixed in the SECURE Act and the maximum number of years they can defer the account is 10-years. This does not apply to spouses, disabled beneficiaries, chronically ill beneficiaries, certain minor children (until they reach age of majority) and existing inherited accounts.  Based on this, we will be looking at our clients situation to determine if it makes sense to convert taxable retirement accounts to Roth Sources.

• Employers will now be able to add annuity options to their retirement plan programs.  This was fought for very hard by insurance companies and we are very concerned about how this is going to play out. We are not the only ones that feel that way.    Read Rick Kahler’s commentary in an article published on December 30 - “Accessing the Damage Done by the Secure Act.”

The Weird 

We think these are weird considering the Act is called Setting Every Community Up for Retirement Enhancement and the following have absolutely nothing to do with retirement.

• The credit for installing an electric car charger has been restored

• Anyone under the age of 21 will be prohibited from purchasing cigarettes and e-cigarette products (i.e. vaping)

• The medical expense deduction was set to go up to 10%, but the Act has it at 7.5% once again in 2020.

• 529 plans can now be used to pay for Apprenticeships

We will be looking at each of our clients' individual situations to determine how this new Act will fit into their financial lives...so more to come!

Uncork the FAFSA - College Planning

By: Becky Eason

Why complete the FAFSA?

As of October 1st, it’s officially FAFSA season for the 2020-2021 academic year. FAFSA stands for Free Application for Federal Student Aid and should be completed by all high school seniors who plan to attend a secondary education school as well as current college students who will be going to school again next year. This form is completed based on the prior year tax return, so if you, or your parents, have completed your 2018 tax return you are able to complete this application. As much as I’m sure you don’t like completing this form it’s very important that you do so, especially for the following reasons.

The primary reason that FAFSA needs to be filled out is that it’s required for financial aid. FAFSA needs to be completed by students who are attending public schools and many times for private schools as well. Did you know that every dollar you borrow in student loans will cost you approximately double by the time you pay back your loan? If you are eligible for any amount of financial aid anything that you receive will help you out tremendously when your student loans enter repayment status. If you receive $100 in financial aid that is actually like receiving $200 if you think about the amount in repayment terms. 

Even if you know or believe that you won’t be eligible for financial aid, it's important that you still complete the FAFSA. The reason for that is that in order to be eligible for federal student loans you need to have a completed FAFSA. Unfortunately, this is not a very well known fact and thus results in many students missing out on the advantages of federal student loans You may not be eligible for any financial aid but if you are able to get federal student loans it’s worth your time and effort to complete the FAFSA. So, why would you want a federal student loan over a private student loan? An advantage of all federal student loans is their built in death and disability clause. If the person who holds the student loan passes away before the loan is repaid it’s forgiven and the estate is not responsible for paying anything back. If the loan holder becomes permanently disabled they can apply for a disability discharge and if the discharge is granted then their federal student loans will be completely forgiven. Another reason for wanting a federal student loan is the ability to have an income based repayment option, especially for students who plan to enter a career that is eligible for Public Service Loan Forgiveness (PSLF). In no cases are private loans eligible for PSLF. Also, a federal student loan can be either subsidized or unsubsidized. A subsidized loan is need based, so not all who complete the FAFSA will be eligible for this loan but the unsubsidized loan has no need clauses attached to it. The great thing about the subsidized loan is that while the student is enrolled at least half time in college the government is paying the interest on the loan, whereas with the unsubsidized loan interest starts accruing as soon as the loan is taken out (as would a private student loan).  

Trust me, I know how dreaded it was to fill out the FAFSA but it is worth all of your time and effort. Please don’t delay in getting this completed, as schools have limited financial aid to offer and they do run out of money. Financial aid is offered on a first come first serve basis. 

10 Essential College Selection Criteria Most Students Ignore

In this week’s blog, Financial Planner and Financial Wellness Coach, Amy Irvine, CFP®, EA, MPAS®, CCFC digs into selection criteria often overlooked when selecting a college.

1. Does the school really matter? — Unless you’re planning to enter a highly specialized field, the school may not be as important as you think it is. As long as the school has a good reputation — like many state colleges and universities — why pay more than necessary to obtain a degree? Caution: No matter which school you select, make sure it’s accredited and that the credits will transfer if you need or want to switch to another school or obtain a higher degree.

2. Do they offer the right degree program? — The degree can pay for itself over and over again...or be worthless to employers. While you may have a strong interest in the historical events of the 1700s, it may be difficult to find a job that pays for this type of knowledge. The greatest current demand is in one of the STEM (Science, Technology, Engineering, and Math) fields, but of course, there are other rewarding areas of study as well. Go to PayScale: Majors That Pay You Back to learn more about salaries in your chosen field.

3. What’s the cost? — CNNMoney’s Cost of College Estimator will provide the estimated annual cost, including tuition, fees, and room and board. It also provides the estimated cost after grants and scholarships — both for one year and all four years — based on family income. Looking at the estimated costs both before and after grants and scholarships can have a huge impact on your ultimate choice. Another source is the Department of Education’s Net Price Calculator Center.

   Caution: Many schools include access to student loans in their financial aid numbers and sales materials. Dig a little deeper to find out if it’s truly free money or simply the ability to incur more debt.

   Caution: Most students are unaware that subsidized (the government pays it) student loan interest doesn’t last forever. For first-time borrowers on or after July 1, 2013, the clock is ticking on the time the government will pay interest on their loans. Switching majors, taking too long to graduate, etc., can trigger thousands of dollars of interest on top of the loan amount borrowed.

   Solution: Follow the new guidelines at Federal Student Aid Loan Subsidy [PDF] and New Rules for Subsidized Loans.

4. What’s the graduation rate? — The ultimate objective for most students is to complete their education in the shortest amount of time, and with the degree needed to secure the best job. Plus, if students don’t graduate, it will be hard for them to repay their loans.

   Yet, the National Center for Education Statistics reports that it took six years for 59% of first-time students at four-year institutions to complete their degrees. Obviously, being able to graduate in less time — ideally four years or less — illustrates the school’s commitment to helping students keep costs down and move into the workforce sooner.

   There are two factors to evaluate in this category:

   1. The number of years it takes the average student to graduate — College Results will help compare multiple colleges’ four-, five-, and six-year graduation rates. Also, consider the Pros and Cons of ThreeYear Degree Programs. Example: Rachel failed to research her school before she attended. Due to the schedule of when classes were offered, it was virtually impossible to graduate in less than six years. She is now struggling to repay $65,000 more in student loan debt than friends who graduated in four years.

   2. The percentage of students who actually graduate — College Completion is a site that identifies graduation rates for two and four-year schools. PayScale is a similar site that highlights graduation rates, college costs, and overall value.

5. How much is the student loan balance for new grads? — As CBS Money Watch highlights, student loan debt continues to rise. The level of debt ties back to the cost of the school, how long it takes students to graduate, and how much of the total cost is covered by grants and financial aid (other than student loans). Locate the best and worst states with student debt at WalletHub, but ask about the actual debt levels at specific schools of interest as well. Some of the lists in #8 include this important data.

6. ROI: Will the numbers work? — The bottom line for all students is how much they’ll be able to earn once they graduate...and if it will be enough to repay the cost of the education. For example, the Center for College Affordability reports that engineering and economics graduates typically earn almost double what social work and education graduates receive by mid-career.

   When comparing potential salaries, there are two criteria to evaluate:

   1) The average salary per graduate of a specific school: PayScale.com: College ROI Report (click on the specific school for details)

   2) The average salary paid for specific degree programs: PayScale.com: Salaries per Degree

   Before applying for a student loan, estimate the costs of the college(s), how much you’ll need to borrow, and the projected income in your chosen field. Then go to FinAid.org to calculate monthly payments and determine if the numbers will work.

7. What’s the student loan default rate? — Schools with a high student loan default rate (often referred to as the cohort rate) send a big red flag to prospective students that the school may be too expensive, the students may be borrowing too much, it takes too long to graduate, or that students can’t find a job upon graduation. To check a school’s three-year cohort default rate, search College Navigator or the Department of Education’s Cohort Default Rate Database.

8. How are the schools rated? — Another step is exploring the myriad Best Of rankings. There are all types of comparisons in these lists, from generic ratings like the Best Schools in the Midwest (best regional schools) or the ones with the prettiest campuses to more specific lists such as the Top Undergrad Schools for Video Game Design (best schools for specific fields/industries).

   Carefully review the scoring system used to create these lists. In some cases they are so subjective, they may not be of much value, but any information will help you become a more informed consumer. When thousands of dollars are at stake and your future career is at risk, it will pay to dig into the details. For more details on the validity of lists, see Do College Rankings Mean Anything?

   Here are just a few of the lists and sites to help compare schools. Some are free or provide only limited information, but others charge a fee for complete access. Many of these 10 questions can be answered by several of the following comprehensive rating lists:

   ▪ Money’s Best Colleges (free basic info; full access $24.95/year)

   ▪ U.S. News: Best Colleges (free basic info; full access $29.95/year)

   ▪ Princeton Review’s Best 380 Colleges (create a free account for basic info; buy the book for $23.99)

   ▪ 50 Best Online Colleges (free)

   ▪ 100 Best Colleges & Universities by State (free)

   Caution: Again, evaluate rankings carefully. These lists are all different, so it’s important to look at the methodology each list uses to rank schools, their rating criteria, and if they allow “featured” schools.

   College Navigator — While this site won’t provide an external rating of the quality of a school, it’s a free government source to build your own table of preferred colleges to compare fees, financial aid, net price, programs and majors, and student loan default rates.

9. Will the school survive huge debt obligations? — In recent months, new regulations and overwhelming debt loads have caused more private and for-profit schools to struggle to stay afloat. Shark Tank’s Mark Cuban warns that this is just the start of the college implosion. This dramatic trend will not only affect current students but graduates as well. A degree from a school that is no longer in operation can lose its value quickly.

   The Department of Education has compiled a list of schools with questionable finances or that may lose access to Federal Student Aid. Consider avoiding schools that don’t meet the 90/10 Rule, where more than 90% of their income comes from Title IV (Federal Student Aid) sources.

10. What’s the mean SAT or ACT score? — This may sound like a trivial reason to select a school, but it’s actually an important stat to consider. If the mean (average) SAT score is 1600 at the college or university, and yours is closer to 1200, what’s going to happen when professors grade on a curve? While ambition is important, barely qualifying to get into a school could set some students up for failure, and could be a major reason they eventually drop out. Go to CollegeSimply: Colleges by Test Score or CollegeBoard: Test Scores & Selectivity to find a school that matches your scores.

This article is shared under the expressed permission and collaboration with Fiscal Fitness Clubs of America. Copyright 2017, Fiscal Fitness Clubs of America. This in an unpublished work of authorship protected by the laws of the U.S.A. It may not be reproduced, copied, published or loaned to other parties without the expressed written consent of Fiscal Fitness Clubs of America, LLC.