The month of February is “Financial Aid Awareness” month, as if those currently paying off student loans needed a reminder of their existence.
Before you go running off in horror at the mere thought of student debt, consider this:
There are some situations where taking on financial aid obligations can be a useful component of your long-term financial plan.
If you’re a young Millennial paying for your own education, taking on student loans is going to be painful no matter what way you look at it.
But- if you are a parent or grandparent looking to fund little Joe or Mary’s college education, financial aid can play a critical role in your strategy to pay for college without blowing your retirement savings.
Taking on temporary debt is a pain, but running out of retirement money before your child graduates is a crisis.
Everybody’s financial situation is different, and your long-term financial strategy should ultimately reflect your unique needs. But here are some general tips for college savers, depending on what stage of life you are in…
The minute you leave the hospital with your precious new baby, you should be on the phone with your financial advisor setting up a college savings plan. (Okay, maybe not that second, but you know what I mean.)
Opening a college savings plan allows parents to take advantage of compound interest, the magical force within the financial universe that accumulates “interest on your interest.” In other words, putting away $100 a year for 10 years will have a much larger return than simply having $1000, 10 years from now.
(SavingForCollege.com has an awesome “Price of Procrastination Calculator” which demonstrates exactly this point.)
Young parents are also increasingly “crowd-sourcing” their college savings plans by encouraging grandparents, uncles, aunts, etc. to make contributions as a birthday or holiday gift. After all, does the baby really need another stuffed animal?
In fact, why even wait to have the baby first? Young couples have already started crowd-sourcing their honeymoon funds in lieu of a traditional wedding registry…. It can’t be long before crowd-funded “college savings plan” baby shower registries follow suit.
Parents and Grandparents of College-Bound Kids
For most parents (or grandparents), funding a college education is a 3-legged stool:
1) They look to cash in the investments or savings they’ve built up for college funding
There is nothing wrong with putting a small dent in your nest egg to pay for college, especially if you have been saving up for this exact purpose. However, it’s imperative that you not lose sight of your long-term financial goals.
College is temporary, but retirement is forever. You can borrow money to put a kid through college, but you really don’t want to find yourself burning through life savings and reverse mortgaging your house as a last resort to pay for your own retirement. And whatever you do….. DO NOT turn off your 401k contribution at work to pay for college.
2) They reduce their current standards of living and take college money out of current cash flow (i.e. they skip vacations, eat out less, etc.)
Welcome to parenthood. Making sacrifices is fun, isn’t it?
3) They borrow money
Borrowing money should be done as efficiently as possible. Putting tuition costs on your 18% interest rate credit card or taking out a cash advance on your Visa is not a good plan- yet people do it all the time. Don’t be one of those people!
The best thing you can do to prepare for college funding is to sit down with a financial advisor and figure out what ratio of the options above works best with your current lifestyle.
It wouldn’t be a bad idea to start filling out a FAFSA form, which is an annoying – but important- process. Fill it out together with your future college student… it’s a good excuse to have an adult conversation about money.
By the end of the process, the FAFSA will give you an “EFC,” or expected family contribution. That is the amount of money (based on your family’s metrics) that the federal government expects you to pay for a college education.
For example, if your EFC is $25,000 and your kid wants to go to a school with $18,000 tuition, you won’t get any aid. If your EFC is smaller than the cost of tuition at your school of choice, you will qualify for financial aid.
The earlier you can get started saving for college, the better.
Contact Bodnar Financial today to discuss funding your child or grandchild’s college education.