Myths about College Planning
The college planning, admission, and financial aid process can seem opaque to both students and their parents. And given all the concerns about rising tuition and confusion about how aid is allotted, it’s not surprising that some myths have arisen about the best way to plan for college costs.
Myth #1: We earn too much to qualify for financial aid.
Some families with high incomes and a lot of assets may indeed not qualify for need-based financial aid. But chances are, you aren’t one of them. By some estimates, only 4% of households have too many assets to qualify for financial aid. The truth is financial aid formulas are complicated, and if you don't apply, it’s hard to predict how much or what type of aid you might get. Filling out the Free Application for Federal Student Aid (FAFSA) as well as any institutional aid forms is almost always worth it.
Myth #2: I’ll never be able to afford a private school.
There’s no doubt private colleges and universities are expensive, and there’s a lot of debate about whether they’re worth the cost. But keep in mind that while the sticker price may be high, private schools typically have more money to spend on financial aid than their public counterparts. And if a student is exceptionally talented, a private school may offer generous financial aid to encourage them to attend. If your child is considering private schools, do research on the net price, not the sticker price, to get a sense of what it might really cost to attend. You should be able to find calculators to help make these estimates on schools’ websites.
Myth #3: It’s better to borrow money from my retirement accounts than to have my child take out student loans.
Borrowing money from your 401(k) or other retirement accounts to pay for college is rarely a good idea. Unless you’ve oversaved for retirement (and few people have), you’re going to need that money when you stop working. Pausing your contributions or drawing down your balance will set you back significantly. While you don’t want to overburden your kids with debt, a small amount in student loans may give them skin in the game, so to speak — modest student loan debt at a low interest rate won’t jeopardize your child’s future. And by keeping your retirement savings safe, you’ll be less likely to have to turn to your children for financial help in the future.
Myth #4: I’m not sure my child will attend a four-year college, so I shouldn’t bother with a 529 plan.
The funds placed in a 529 plan can be used for qualified expenses at a wide variety of schools, including community colleges and accredited trade and vocational schools. You can even use the money at some foreign schools. Plus, if your child ends up not needing the money, you can name a new beneficiary for the funds, like another child, your brother or sister, a niece or nephew — even yourself. In the worst-case scenario, you simply use the money for noncollege expenses, though that comes with a penalty. But whatever you do, don’t let the chance that your child won’t attend school stop you from saving.
Myth #5: My child is a genius or great athlete who will get a scholarship, so I don’t need to save.
Scholarships are a great way to help for college, and more than $3 billion in gift aid for education is awarded to students every year. That sounds like a lot, and it is. But unless your child is a true phenom, you can’t be sure he’ll get a piece of that pie — or if he does, how much. You really should start saving for college when your children are very young, well before you have any idea of whether they’re a math genius or football star.
Myth #6: We should put all college savings in a 529 plan.
Not necessarily. A 529 plan has many advantages, like tax-free withdrawals for educational expenses. But you may want to diversify your savings. If your son or daughter does get a scholarship, drops out, or doesn’t attend college, you can use those other savings however you want, without paying a penalty (unlike a 529 plan).
Myth #7: I should put college savings in my child’s name.
It certainly seems like it might be a good idea to keep your child’s college savings in his own name. But that’s not always a good idea. For one, college financial aid formulas generally see 20% of a student’s total assets as being available to pay for education every year, compared to just 5.6% of a parent’s assets. More assets in their name could translate into less financial aid for your child. Once your child turns 18, that money is his/hers to do with as he/she wishes (unless it’s money held in a trust with restrictions on its use). And not all young adults will have the wisdom to use that money wisely.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.