College funding is a complex topic. There’s no one set answer as to what works best for everyone. Due to varying individual circumstances, different options will be more appropriate for one individual than for another. But there are some general guidelines and useful strategies that can help most people.
Financially planning for college goes beyond accumulating funds, though many people never really venture further than this aspect of it.
Part of the problem is that the middle class feels stuck — a “damned if you do, damned if you don’t” scenario in which many people believe that the primary impact of saving for college is a reduction of available aid that renders saving pointless.
Strategically Saving for College
Saving for college needs to be strategic. How and where you do it can affect your aid eligibility. Knowing the basics in advance can help you to build funds while mitigating any reduction in aid due to your savings.
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The biggest determinant of aid eligibility is a student’s expected family contribution (EFC). The EFC is determined from the Free Application for Federal Student Aid (FASFA), which parents file for each year of their child’s education.
Perhaps the biggest overlooked issue in managing college savings is in managing who “owns” the savings.
Of course, it’s all moot if the parents make a few million a year — need-based financial aid ain’t gonna happen. But for middle-class families, need-based aid is a reality. And choices made in the years before college can have a significant impact on aid availability.
That is to say, two families can have identical circumstances, but one family will get greater aid because of how their funds are positioned.
Most families will save either in 529 plans or in education savings accounts (ESAs). There are advantages to each, but 529s are more common, as more people are eligible for them and the old rules made ESAs less desirable. I won’t delve into the details here, but there are a lot of resources to help decide which plan to use.
These plans will be considered parental assets on the FAFSA. This is a good thing — parental assets have a smaller effect on EFC than the student’s assets do.
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To the extent possible, assets earmarked for education should be in a parent’s name, not the student’s. But be careful: Moving assets within two years of starting college can cause other problems.
Saving for College Yourself
That said, teens should still save for college themselves. Depending on what they’re able to save — and their parents’ financial situation — a 529 plan may be appropriate. This way, the money is treated as parental assets for EFC purposes while still leaving them available for the student’s use.
Having teens save for their own college education can have additional benefits. For one, it can make the high cost of college feel a lot more real. Some teens don’t see $50k per year for college as a huge number — it has no real relevance. Saving for a couple of years and making just a small dent in the total may help place the number into perspective.
Routinely saving toward a financial goal is a lifelong habit that kids should learn as early as possible. This is one extremely important reason to have your teen save for college.
Budgeting and Planning for College
Teens should prepare a college budget a few years before college. The budget should cover all costs of attending college, including books, transportation, food, entertainment, and even laundry.
A prospective student should rework her budget for each school that she’s seriously considering — her short list. This will help highlight the differences in affordability between the schools.
To help prepare your teen for creating a budget, have her track her expenses. She should track everything she spends money on, even if it’s your money. Seeing what she spends on entertainment, clothes, and so on will not only help her to develop a school budget, but will also begin to instill an awareness of costs and build good money habits.
One of the more difficult decisions when planning for college is when to have your teen get her first credit card. Using credit responsibly through her school years will help her graduate with a solid credit score and pave the way for her future.
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But she should exhibit fiscal responsibility and good money-management skills before she gets her first card.
Employment While in College
While working is important to help save for college, it can also be important during college. Working a few hours a week can pay for most — sometimes even all — of a student’s incidental expenses while continuing to provide an opportunity to build good money-management habits.
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Current research shows that students who work a few hours a week develop better time-management skills.
They even do better in school than students who don’t work. Have your teen use a spending plan for her work earnings. She should plan how much to save, know what her money should be used for, and track where it actually goes.
Final Thoughts on Planning and Saving for College
These basic steps help to ensure that teens are integrally involved in financing their education. Planning and saving for college do make a difference. By assuming partial responsibility for financing college and using the process as a learning opportunity, your teen can learn valuable financial life skills while contributing to her education.
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These skills may well be some of the most important ones that she ever learns.