Your Child’s Education How To Finance It

Don’t leave your children’s future to chance. Plan now to give them the brighter future they deserve. This guide was developed by Metro Accounting and Tax Services to help parents plan for the future educational needs of their children.

How can you properly fund your children’s education without draining your current cash flow? What should you do if they are a few years away from college and your education fund won’t be enough? How can you increase your chances of getting financial aid? What tax benefits might be available to you? This Financial Guide answers these questions.

With the costs of a college education rising every year, the keys to funding your child’s education are to plan early and invest shrewdly. However, there are steps you can take if you get a late start. Moreover, there are a number of effective techniques for increasing financial aid opportunities and reducing taxes. Here are some guidelines–geared to parents whose children are no older than elementary school age–for funding your child’s education.

Start Saving Early

We cannot emphasize enough that getting an early start is basic to funding your child’s education. The earlier you start, the more you’ll benefit from the compounding of interest.

College is expensive and proper planning can lessen the financial squeeze considerably–especially if you start when your child is young. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.4 percent before adjusting for inflation, rising from $9,420 in 2015-16 to $9,650 in 2016-17. Average published tuition and fees at private nonprofit four-year institutions increased 3.6 percent before adjusting for inflation, rising from $32,330 in 2015-16 to $33,480 in 2016-17.

When should you start saving? This depends on how much you think your children’s education will cost. The best way is to start saving before they are born. The sooner you begin, the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments after time.

Find Out How Much You’ll Need To Save

How much will your child’s education cost? It depends on whether your child attends a private or state school. For the 2016-2017 school year, the total expenses–tuition, fees, board, personal expenses, and books and supplies–for the average private college are about $45,370 per year and about $20,090 per year for the average in-state public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can cost more than $60,000 per year whereas the costs for a state school can be kept under $10,000 per year. It should also be noted that in 2016-17 the average amount of grant aid for a full-time undergraduate student was about $5,880 and $19,290 for four-year public and private schools, respectively. More than 70 percent of full-time students receive grant aid to help pay for college.

Choose Your Investments

As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different from those used if you start when your child is age 12.

The following are often recommended as investments suitable for education funds:

1) Series EE Bonds are extremely safe investments.

2) U.S. Government Bonds are also safe investments that offer a relatively higher return. If you use zero-coupon bonds for your child’s education, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don’t receive it until maturity.

3) CDs are safe, but usually provide a lower return than the rate of inflation. The interest is taxable.

4) Municipal Bonds, if they are highly rated, can provide an acceptable return from the tax-free interest if you’re in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child’s life.

5) Stocks contained in an appropriate mutual fund or portfolio can provide you with a higher yield at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

6) Deferred Annuities provide you with tax deferral, but the yield may not be acceptable because of the relatively high cost of these investments. Further, amounts withdrawn before you reach age 59-1/2 may be subject to a 10 percent premature withdrawal penalty.

If You’re Caught Short

If you have insufficient savings for your child’s education when he or she is close to entering college, there are ways to generate additional funds both now and when your child is about to enter school:

1. You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
2. You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
3. You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
4. You (or your child) can apply for various types of student aid and education loans (discussed below and in Info Sources).

Sources Of Financial Aid

Here is a summary of the possible sources of financial aid. The types of aid and tax implications change frequently, so consult your financial advisor for specifics when you’re approaching the time to seek financial aid.

Grants, the best type of financial aid because they do not have to be paid back, are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

• Federal Pell Grant Program. Pell grants are need-based.
• State education departments may make grants available. Inquiries should be made of the state agency. Employers may provide subsidies.
• Private organizations may provide scholarships. Inquiries should be made at schools.
• Most schools provide aid and scholarships, both needs-based and non-needs-based.
• Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Loans may be need-based, and others are not. Here is a summary of loans:

• Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however, an unsubsidized version is also available.
• Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
• Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices or by calling 800-333-4636.
• Schools themselves may provide student loans. Inquiries should be made at the school.

Work-Study Programs. This is a program that is federally funded and based on the family’s financial need. The student works on-campus and receives partly subsidized pay. The receipt of work-study funds does not affect the level of “need” for purposes of need-based grants and loans.

To make a thorough investigation, you should fill out the financial aid application, which you can obtain from the school’s financial aid office. You will have to provide tax returns. The amount you are determined to be eligible for depends on your income, the size of your family, the number of family members currently attending college, and your assets.

Don’t leave your children’s future to chance, plan properly to give them a head start. Engage the financial advisors at Metro Accounting And Tax Services and we’ll help you chart the course of a brighter tomorrow for your children. Call the Office now 407-240-5143.

User | 16/10/2017