By Ellie Kay, America’s Family Financial Expert® (Note: Ms. Kay will be speaking at the Heroes at Home financial event on Ellsworth AFB on Thursday, April 16, 2015 from 9-11am at the Deployment Center Auditorium. For more information, please call 605-385-4663.)
One of the biggest reactions I get from people is when I tell them I’m a mother of seven. They usually ask, “What? You have SEVEN children?” To which I reply, “yes, five by birth, two by marriage and all by love.” Being financially responsible for all those kids has been a challenge, especially when it comes to college.
When people ask me how we are putting our kids through college debt free, the answer is multifold. First, we train our children from a young age that going to school, doing your homework and getting good grades is their primary “job.” By teaching them a good work ethic, we are laying the groundwork for scholarships and more. Secondly, we send them to schools that we can afford or where they get the best scholarship offers to cover the most expenses. Thirdly, we have saved a modest amount of college money to help them pay their room and board and partial tuition in some cases. Lastly, but certainly not leastly :), we require that they work part time in the summers or during the school year (through a work/study program or a regular job) in order to do their part in paying for college. By implementing these four disciplines, the youngest five Kay kids are set to graduate debt free. Of the two that are going to college now, we have over one million in scholarships.
First Things First
In any discussion of college costs, it’s important to keep priorities straight: You’ve got to leave yourself some fun money for retirement. How else can you afford that mechanical bull riding lesson and those parasailing flights (been there, done that, LOVE it)?
I really believe that you, as a parent, should try to avoid borrowing on your future in order to pay for your child’s future. Why would you want to take one of your greatest investments (your retirement) and leverage it for college expenses? Yet millions of parents make that devastating financial choice every year. I’m talking about avoiding any college funding plan that includes a home equity loan, a HELOC (home equity line of credit) or refinancing of an existing home mortgage. These options reduce the amount of equity in your home, increasing the risk of possible foreclosure and you incur costs in interest charges that may cost you more if the term on the new mortgage is greater than the remaining term on the existing mortgage. For example, if there is ten years left on the mortgage and parents get a new 30 year loan. Furthermore, if parents choose to pull out enough money in equity for the first year of four years of college all at once, then they’re paying interest on money that won’t be needed until the upcoming sophomore, junior and senior years. Instead, look at the following options to pay for college.
The College Mantra
When I was a young adult, got married and began having kids (in that order), I was first exposed to the whole idea of “the college my child gets accepted to.” As a mom of many who has already launched a few college bound kiddos, I’m still hearing, “What college did they get accepted into?” The part of that question that amazes me is that the answer that is most impressive are also the most expensive (Columbia, Harvard, Stanford, Yale, etc). These schools have averages four year costs of $188,000 (Columbia); $240,000 (Harvard); $186,000 (Stanford) $193,000 (Yale). While an average of 40% of the students who attend either get financial aid, grants or scholarships, they only average out to assistance of $9600 per year. This leaves a boatload that the student and mom/dad owe for college. Most of this is usually in loans of some kind. So then the average student graduating from some of the most prestigious colleges have student loans upwards of $100,000.
So why is the question: What college did they get accepted into?
The question should be: What college did they get accepted into that they can afford?
Why do you want to leverage your future (through HELOCS or loans) or leverage their future (through massive consumer debt) when it will take many years of earning power for them to pay back those loans? One of the most common problems I hear of has to do with the burden of dual student loans in a marriage. Sometimes, parents have to play hard ball and refuse to sign a student loan for a college that their kids cannot afford. We’ve had to do this in the past as well and it’s not easy, but it’s the right thing to do for everyone involved. You can’t control what your child will do if you say “no,” but you can control the financial decisions that you think are best for your family. Remember my mantra – “Our love for you is unconditional, but our money is conditional.”
The new mantra should be: I will go to the school where I can get the best education possible for the least amount of student loan debt.
One of the best things you can do for your college fund is to teach your kids a good work ethic at home and school. Ride the homework train on them in the afternoons. Teach them that getting good grades, pursuing passions in sports, academics and the arts and working hard are their main “jobs” in high school. Plus, be sure to let them know you expect the to not only get scholarships, but to participate in work study programs, have jobs in the summer between college semesters, and actually earn part of their way through school! It’s OK if your child has to take a year off between their sophomore and junior years to work (one of ours did that and finished well at Columbia) or if they have to sell their car to pay for school (who can afford to keep a car in NYC anyway?). Sometimes decisions that keep mom and dad debt-free are difficult, but they are well worth it in the long run.
If you want to see how this million dollar mantra worked for us, read my blog about “The Million Dollar Kid.” It will motivate you as you follow these college savings ideas.
Investing in Creative Savings Methods
Before we discuss traditional financial savings plans to pay for college, let’s consider the fact that any way you get college paid for that does not involve a cash investment is more money in the bank for you and your student. The following ideas are ways to pay for a college degree through plans that are available for those who are forward thinking and purposeful in their desire to provide a debt free college experience. We’ve used several of these for our kids and every $1,000 that we don’t have to spend on tuition, college credit, books, room and board is $1,000 that will counter the huge student loan debt that most parents assume as par for the education course. It’s an adage I’ve used before: a penny saved is more than a penny earned—especially when it comes to paying for college!
Here is where some of your child’s giving pays off. When you’ve trained your child to give back to the community, don’t let those good deeds go unrewarded. Organizations such as Teach for America, Peace Corps, and Americorps all offer educational service awards to students seeking cash and a way to make a difference in the world. The best part is that unlike other scholarships and grants, these service awards won’t affect any federal financial aid eligibility. Even if your student has already acquired student loans, organizations including the National Guard, National Health Service Corps, and National Institutes of Health all sponsor loan forgiveness programs that turn borrowed cash into free dough in exchange for post-graduate service.
You can open a 529 account for any beneficiary or gift money using Ugift into an Upromise Investments 529 plan*. If you don’t already have a 529 plan, then you are really missing out, because the contributions can benefit from tax deferred growth. Also, gifting into one of these plans may also mean that you can possibly take advantage of your state’s tax deductions. Just check to see if you are eligible for state income tax deductions or credits for saving for college. For example, parents and grandparents can contribute as much as $13,000 ($26,000 if married filing jointly) into a 529 plan without incurring gift taxes. A special rule allows married couples to gift up to $130,000 ($65,000 if single) as long as no additional gifts are made to that beneficiary over a five year period. This also applies to recent college grads who might appreciate a meaningful gift to help pay a student loan payment. Plus, you don’t have to be a parent or grandparent to participate; other friends and family can make contributions to your child’s 529 plan by gifting money or buying gifts, which brings me to my next point—how to save money by spending money.
Most people, know about Upromise* from signing up for their buying program. I’ve been participating for years by going to Upromise.com* and then purchasing through participating online retailers. These are stores where I would shop anyway, and I get anywhere from 1% to 25% back for the purchases I make. And our family isn’t the only one doing this. Last year during the holiday season, Upromise* members received $12 million in college savings rewards from eligible holiday spending. Membership is free, and members have collectively earned $575 million in college savings from purchasing items online or even by buying gas or groceries. I book a lot of travel for my business and often find myself eating out—all these are also included toward my children’s 529 plans.
Double Dipping: College Credit in High School
Several of our kids have taken Advanced Placement or International Baccalaureate classes throughout their high school semester. These are college level courses that are offered at their high school. At the end of the year, they take a test to see if they score high enough to get college credit. The cost of the test is more than offset by the value of the college credit that will be awarded to your student if they pass. It is important to note that not all colleges accept these credits, so it will be important to check with the admissions office of the college of your choice. A secondary benefit of these courses is that they can help students get into college because having AP and IB credit makes for very good resume fodder in college applications. It shows ambition and a good school work ethic. For information regarding your state’s programs, go to the National Association for College Admission Counseling, or www.nacacnet.org.
One of the coolest ways to pay for college is to let your local high school district help pay for it while your child is still in high school. Many school districts now partner with local colleges to offer college credit for high school students who take classes at a nearby community college. Consequently, these classes count toward both the high school and college degree requirements. There are thousands of kids each year who graduate from high school one day and then get an associates degree the next day. Talk about a Cha Ching Factor!
Be aware that these programs vary from district to district and state to state. In some cases, the dual enrollment classes take place in the high school during the regular school day. Yet other programs require students to attend classes on the college campus, alongside other college students.
Bob and I are very careful about the fact that we want our kids to be kids and not have adult responsibilities too soon. There is, however, a balance. While we are real sticklers on homework and housework and don’t allow the kids to treat us like we’re their maids, we do understand that they are still kids and need to have fun in their childhood. Consequently, if they are enrolled in AP, IB or college classes while in high school, we try to make sure that they do not overdo it. We limit their extracurricular activities and discourage a regular part time job so that their primary “job” will be to get good grades in their advanced courses. It would be a self defeating effort to have them take advanced or college classes only to have their overly busy schedules negate their ability to get good grades. Remember, there is not credit if they don’t pass the AP or IB tests or pass the college course they are taking! So look closely at the curriculum before you sign your student up for these classes, establish work/study habits, set boundaries to preserve the integrity of their grades and leave room for kids to be kids and have fun!
Community First, Four Year Later
Think of it as a half price sale for education: You buy two years at full price; get two for half-off or more. The average community college tuition rate is 40 percent of the average tuition rate at four-year public colleges and 10 percent of the average tuition rate at four-year private institutions. If your child attends a community college for two years, you’ll not only save money on tuition, you’ll also save on room, board and transportation by sticking close to home. The key to getting the most value for your education dollar is to make sure these college credits are transferable and assure that it is working toward the four-year college goal.
My high school friend, Karyn Maxwell, had a dad who was a baseball coach. He worked his way up to the college level, and by the time Karyn’s older sister graduated high school, he was the baseball coach at Texas Christian University. Both Karyn and her sister went there for free due to his employee benefits. If you, or your child, has some latitude in your career, consider working at a local college for the tuition benefits it would afford you or your child.
Most universities offer some form of tuition remission to their full-time employees and others extend the benefit to part-time employees as well. If you can’t secure a staff position at the school of your choice, don’t forget that many companies offer tuition reimbursement packages. A study conducted by the Society for Human Resource Management estimates that 67 percent of all employers offer financial assistance to employees seeking an undergraduate degree.
College Savings Plans for Every Family
Now that we’ve exhausted the creative alternatives to pay for college, let’s take a look at some traditional methods. Saving for college is as individualized as your dreams. College aspirations vary from family to family and even from child to child. It will also vary based on different factors such as your income level, the number of children you have, the amount of college savings in existence, scholarships, federal aid availability, and the number of years left before a child starts college. Here’s a guide to the most popular investment tools:
- UGMA – Uniformed Gifts to Minors Act
Parents of young children can start saving now for education but should do it the tax-smart way. By investing in a UGMA in a child’s name, income is taxed at the child’s marginal tax bracket rather than the parents. The account must be registered in the child’s name. An adult (usually a parent or grandparent) serves as custodian and is responsible for investing and managing the assets. But the child is the “beneficial owner,” meaning the assets really belong to the child. At age 18 (in most states), control of the assets must be turned over to the child (which could be a disadvantage for this plan when it comes to financial aid qualifications.)
All states offer UGMAs, and many have adopted the Uniform Transfers to Minors Act, or UTMA, as well (a “T” not a “G”). A UGMA allows children to own stocks, bonds, mutual funds, and other securities; while a UTMA allows the children to also own real estate. Under UTMA, parents can delay giving the assets to the child until age 21.
For example, if your bouncing, beautiful 3-year-old daughter has interest income of $700, the tax on that is zero. If she had income of $1,400, the next $700 is taxed at her 10% rate. If you’re in the 28% bracket in 2009, the tax on the $1.400 total would be around $400. Your daughter is only paying $70, so you’ve just saved $350 more for her college education.
If income from these bonds is used to pay for education expenses, then that interest may be excluded from taxes. But this exclusion is phased out beyond certain income levels.
The interest on these bonds is deferred until they mature, when it is paid in a lump sum. Parents do have to pay income tax on interest as it accrues each year the bond is held. It’s often wise to “ladder” these bonds, where the bonds come to maturity in each year of the child’s college career.
This is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Service found at www.irs.gov). 529 plans are usually categorized as either prepaid or savings, although some have elements of both. Every state offers a 529 plan and it’s up to each state to decide what it will look like. You can go to www.finaid.org to review your state plan. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far). Parents can invest in any state’s plan, no matter where they live and regardless of what plan they choose, their beneficiary can attend any college or university in the country. What’s more, grandparents or other benefactors can contribute money to a 529 plan. However, they may crimp a child’s ability to get financial aid in the future. It is important to review the state ratings for residents and non-residents as some are rated better than others. These plans are growing in popularity, and it is projected that there will be a total of $175 billion to $250 billion invested in 10 million to 15 million accounts by the year 2010.
- Coverdell Education Savings Accounts
The Coverdell ESA will allow up to $2,000 of pre-taxed income to be invested annually. If the modified adjusted gross income is less than $95,000 as a single tax filer, or $190,000 to $220,000 as a married couple filing jointly in the tax year in which the money is contributed. The $2,000 maximum contribution limit is gradually reduced if the modified adjusted gross income exceeds these limits. There are limits on how much can be invested based on income, and the funds must be spent before the child turns thirty. This education IRA will not interfere with the parents’ ability to invest in a tax-deferred annuity in their own retirement account. But it will count heavily against the student when financial aid packages are calculated.
Because Coverdell IRA funds can be rolled over into a 529 without penalty, parents can sidestep its principal drawbacks—the age limit and the fact that the IRA counts as the child’s asset, which can adversely affect his ability to receive need-based loans. Therefore, a Coverdell account may be the best single investment option for parents whose income is below $50,000. The accounts are easier and less expensive to set up than 529 plans and people in this lower tax bracket aren’t usually able to take advantage of the maximum lifetime contributions allowed under a 529, which range from 110K to 305K because they don’t pay that much tax in the first place.
A 529 prepaid plan is one that is offered in individual states or educational institutions, and they are prepaid similarly to a 529 plan but are less risky. They allow parents to pay tomorrow’s expenses at today’s prices either by the year or by the credit hour. The drawback is that even though parents can often transfer some of these plans to other state colleges or private tuitions, those schools may not guarantee the same services and prices. Thus, college students could come up short. Contributions to prepaid plans might also reduce a student’s eligibility for financial aid on a dollar-to-dollar basis, more than with a 529 plan. If the child does not attend college, the contributions are refundable but there might be a cancellation fee and/or loss of interest earned. It’s important to compare 529 plans to find the plan that works best for different families, you can go to www.savingforcollege.com to review the latest updates on these various plans. These plans are best if 1) parents don’t expect to qualify for financial aid, 2) parents are conservative or novice investors and 3) parents understand the risks.
The University’s financial aid office is a clearinghouse of information. A good aid office will not only help students determine what loans they qualify for, but they will steer them to participating lenders who are offering the best terms and service.
Filling out the FAFSA (Free Application for Student Financial Aid form found at www.fafsa.ed.gov) is the first step in applying for aid that includes: 1) need-based guaranteed loans (Stafford Loans are variable while Perkins Loans are fixed.) 2) Grants—the Pell Grants and the Federal Supplemental Education Opportunity Grant each provide a gift of up to a designated amount per student per student year. 3) Work-study. Students can receive up to $2,000 per year, 25% of it matched by the participating institution, from the federal work-study program.
Another option is that the financial aid office might offer a tuition deal when your student is a freshman. Some schools may allow you to lock in your student’s tuition for four years if you are willing to pay more the first year. By choosing that option, some families are saving a boatload of money by the time their student is in their junior and senior years because many universities have raised tuition every single year by as much as 8%. The only caveat is that if you leave the school you don’t get a refund on the premium you paid in that first year.
There are also state loans and grants available, and the financial aid office should be able to quickly asses the student’s eligibility.
Millions of dollars of scholarship money go unclaimed every year. This is free-lunch money that parents or prospective students who are willing to do some detective work may find more quickly than they think. Fastweb.com or Salliemae.com has over 1.9 million scholarships to research valued at 16 billion dollars! Make this your child’s part time job—investing 3 to 4 hours a week filling out scholarship forms. Your child, for example, could write a 500 word essay on skateboarding or other areas of interest—there are thousands of scholarships that go unused every year because kids don’t apply for them. Don’t forget to have students apply to local civic organizations and community scholarships as well—the high school counselor should have a list of these scholarships.
Q and A With Ellie Kay
The following is a transcript from one of Ellie’s regular appearances on ABC NEWS “Good Money” show.
Q: We have a child graduating from high school this year and want him to start out right with good credit scores. How does a teenager go about starting to build good credit?
A: I’ve launched two high school graduates in the past two years, and I know how important it is for them to have good credit. A good credit score will not only impact the interest rates they pay for a new car, but the scores also determine whether they pay a utility deposit, if they’ll get a good job and how much they may pay for their auto insurance.
First, they need to open their own checking and savings account near their college. Second, they should apply for a credit card with a low credit limit ($500 to $1000). They can either apply for this at their bank or find a credit card provider at www.bankrate.com*. Do not ever cosign for a credit card for your child and make sure they have accountability for the use of their card so that they do not get into credit card debt. They should pay off their card each month, or they should make a commitment to cut up the card if they cannot pay it monthly. Our oldest son, Daniel, started this way and has already built good enough credit scores to pre-qualify for a modest homeowners loan. By starting small and paying consistently, they can begin to build good credit scores.
Q: I’m going to start college in the fall, and my parents require that I pay for my own books. Do you have any tips to save money in this area?
A: Textbooks can be one of the most expensive items a college student needs to purchase when heading back to school this year, but they don’t have to be. The average student pays more than $600 for course materials – the largest expense after tuition and room and board. By renting textbooks through Follett’s Rent-A-Text* program, students can cut costs by 50 percent or more. CafeScribe’s* digital textbooks are another great way to save, and both options are available to purchase in-store and online through eFollett.com*.
Last year, Rent-A-Text* saved students more than $130 million. And this year, Follett* is doubling the number of titles in the program, which means students will have even more opportunities to save. I’m all about the ‘more bang for the buck’ when it comes to maximizing savings. We didn’t even know rental was an option until recently… we really wish it had been around when our first kids went to college.
- While there are many options for textbook rental out there, make sure your rental program accepts payment options like financial aid or campus cards to ensure you make the most of your available funds.
- A good rental program also saves you money by eliminating shipping costs, and allowing you to pick up materials at your campus store.
- And keep in mind, there are a variety of affordable choices at the campus store from new, used, rental and digital.
Q: My husband and I want to help with our son’s college expenses (he graduates in two years), and we don’t want him to be straddled with huge student loans. Several of our friends and other family members have said, “Just take out a second mortgage or use the equity in your home to pay for college.” What do you think about that?
A: I believe that you should never borrow on your own future to pay for your child’s future. In any discussion of college costs, it’s important to keep priorities straight. Your kid’s education shouldn’t cost you your retirement. This means it’s not a wise idea to take out a home equity loan, an equity line of credit or refinance your mortgage in order to pay for school. This would reduce the amount of equity in your home, increase the risk of possible foreclosure and incur costs in interest charges that may cost more if the term on the new mortgage is greater than the remaining term on the existing mortgage.
Ellie Kay is a national radio commentator, a frequent media guest, popular international speaker, and the best-selling author of fifteen books including her newest release is Lean Body, Fat Wallet (Thomas Nelson, 20140. For money savings links, or to view Ellie’s free blog, go to www.elliekay.com*).
 Student Watch, NACS.org
* No federal endorsement intended