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! 

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!

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.