How Can I Afford to Send My Child to College?

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Helping your high school senior as s/he applies for college is a natural part of parenting. However, when it comes to financing a college degree (especially for parents who have several children or are already struggling financially) – how much help can you give? With the radically rising prices of college these days, along with families who are already dealing with money struggles, it can be next to impossible for some parents to foot their child’s education bill.

In fact, many people are still paying off their own student loans by the time their children are preparing for college. Currently, there is no formal plan in place in the U.S. to help lessen this strain on families, but there may be hope after the 2016 presidential election.

Assuming there are no changes made to the current cost of getting a college education, parents need guidance! A recent study showed that, when it comes to students with parents on the bottom half of the U.S. socioeconomic ladder, they make up only 14% of the undergraduate population at top U.S. universities.

Many students and parents feel that applying to college is a worthless endeavor if they wouldn’t be able to afford it anyway. It’s important for these families to know that there are in fact, many options that will allow your child to attend college (often at an elite university!) at a significantly reduced rate. Often times, students who are high achievers but in a lower economic bracket are given free rides.

The first thing that most high school guidance counselors recommend is to use every resource you can find to look for appropriate college scholarships. Believe it or not, more than $100 million goes unclaimed every year in college scholarships! The reason for that is that many people simply don’t know where to look.

Scholly is an app that can be downloaded via the App Store, Google Play, and can now be  accessed via the web. Scholly was designed to help take some of the burden off of students and their parents when applying to colleges. The app uses an adaptive matching engine that matches students with scholarships that they qualify for, and weeds out things like internships and advertisements.

In addition to private scholarships like those that can be found via Scholly, families with financial struggles should know that all colleges are not created equal. If your child is a high achiever, s/he will benefit from attending college with classmates who are also high achievers. Simply because this means considering elite colleges does not mean it is a worthless endeavor.

In reality, students who come from poorer families often either A) Don’t bother applying; or B) Only apply to local, less expensive schools rather than applying to a top university. A great number of high school seniors have a poor understanding of the college financial aid process and assume that their family could not afford the cost of an elite education. The truth is that at some elite schools, families who earn less than $65,000/year do not have to pay anything!

While we admit that our country needs to adopt a better way for all students to receive a higher education, as it stands, there are financial options available for those students who have the grades to be accepted. To learn more, visit Scholarships.com.

 

Image credit: COD newsroom

Is it OK to Raid My 401(k)?

8265139231_3bcf9c8a26Image source: Chris Potter

Last week, we discussed the challenges that parents are facing when it comes to putting their kids through college while the cost of tuition has risen and continues to rise to astronomical heights.

Without careful planning years before your child(ren) even begin to think about applying to college, you could conceivably find yourself between the proverbial rock and a hard place when it comes to financing four years (and sometimes more) of continuing education. In a quandary, you may take a look at all the money you’ve saved for your upcoming retirement and wonder if you could or should borrow from one or more of those accounts – in particular, your 401(k).

Our general advice to parents who are contemplating borrowing money from their 401(k) in order to give their child a fully or at least partially funded college education is this: Back away from the 401(k). The risks associated with filching your own retirement funds include: money in your 401(k) is tax-sheltered, however, when you pay back what you borrow, you must use after-tax money. Sure, you have 12 months to pay back any money borrowed without a penalty, however, if you lose your job or leave by choice, any 401(k) loans that you have taken must be paid back immediately. If you fail to do so, you’ll be charged income tax on the remaining amount you owe, plus a 10% penalty fee.

With all of the above being said, we feel that giving blanket answers to financial questions isn’t very accurate, even regarding taking a retirement loan. So, YES, there is a case to be made for tapping into your 401(k) account, in very specific circumstances.

If you can confidently say that you are totally secure in your retirement and that you don’t actually need the money provided by your 401(k) or IRA, it could be a smart move for you to use some of that money to pay for your child’s or grandchild’s college tuition.

Another circumstance: if you happen to fall into a tax bracket that charges zero percent because you have high medical costs, distributing some of your retirement money now is probably a good idea for you and your loved ones. Wondering why? Simple – it’s better to share the wealth while you are in a zero percent tax bracket instead of gifting the money through your Last Will and Testament because it’s unlikely that your beneficiaries will be in the zero percent tax bracket at the time of your passing. In fact, some may fall into the fifty percent bracket if they had great schooling and pursued a high paying career. Naturally, because of the higher taxes they’ll have to pay, they will receive significantly less of your hard earned savings. Better to use the money now while you can get more bang for your buck.

Even if you are in a fantastically secure financial position regarding retirement, there are still better ways to help your child or grandchild pay for college than dipping into your retirement accounts, just in case things change drastically. Since retirement brings with it many uncertainties, it’s still a good idea to have your (grand)child take out some student loans. As long as the child remains in school, offer to pay for the interest on the loan. This will drastically lower the amount of accrued interest on the loan(s). After graduation, you can assist with loan payback, as long as your retirement outlook is very bright. In that situation, though, it would still be better if you were using income other than your retirement fund to help out.

Save for Retirement or Put My Kid Through College?

4075547422_112bac81a8Image courtesy of Tulane Public Relations

As the costs of attending a four-year college or university in the United States continue to rise, so do the number of parents who have or are tempted to take money from their retirement accounts in order to send their child(ren) to college.

Although the desire to provide your child with a fully funded college education is natural and admirable, robbing your retirement savings to do so is likely to be a grave financial error. And, even though being weighed down with too many student loans can be a problem of its own, remember this: you (and your child) can borrow money for college costs. You cannot borrow money to support yourself when you retire.

Many parents who were (or still are) burdened with student loans of their own have a strong desire for their children to avoid that particular hassle and instead make a debt-free entrance into adulthood. However, it’s crucial that you are able to support yourself during retirement, because the other option is to have your children care for you in your golden years. Frankly, the cost of some student loans will be much cheaper and easier for them to deal with than supporting you (and potentially your spouse) indefinitely.

Withdrawing money from your retirement accounts will do more than just reduce the balance. In fact, the lowered balance may be the least of your concerns. You will lose out on the compound interest that your retirement account(s) gain over time. Also, withdrawing money from a retirement fund can count as income which would then be taxable. With the additional income, many parents may render themselves ineligible for financial aid the following year. Another thing to keep in mind is that anyone under the age of 59 1/2 who borrows from their 401(k) will be required to pay the loan back with interest within five years.

The key to saving for both retirement and college is careful and deliberate planning. Research and invest in a 529 college savings plan. A 529 plan will allow you to save money at your own pace, making withdrawals when necessary without being charged any fees, and without being taxed. Studies show that parents who invest in a 529 plan are significantly more successful at paying for at least a portion of their child’s college tuition.

In order to be consistent, set up automatic withdrawals from your paychecks that go directly into your 529 account. This will remove the need for you to deposit money into the account, which may result in hesitancy when funds could be used elsewhere. Try to gradually increase the amount you deposit on a yearly basis or as you get income raises. Apply bonuses, tax refunds, inheritance money, and/or other financial windfalls to your 529 college account (at least in part). Ask friends and family members to donate to your savings plan in lieu of gifts whenever possible.

Sallie Mae’s Upromise program is a fantastic way to save money for college without really doing anything at all! Upromise allows you to earn up to 5% cash back on purchases made through their more than 800 affiliated online retailers. You can even earn money by eating at participating restaurants and by using e-coupons for grocery and drugstore items. Getting grandparents, aunts, uncles and other close family members to participate will help you increase your savings by leaps and bounds!

Even though the general advice is to avoid taking money from your retirement account to pay for your child’s college tuition, there are exceptions to every rule! There are some instances where it can be ok to dip into your 401K in order to write those tuition checks. Check back here next week to learn when and why doing so would be advisable.