Category: Education

Posted on

Saving for Education

It’s almost October 1st. Parents with college-bound students know that October 1st is the earliest they can file their Free Application for Federal Student Aid (FAFSA).

They also know that saving for education is best started early.

Even if done with a standard savings account, getting started early, and maintaining a consistent deposit, will help to lessen the risk to savings later in life. In addition to a standard savings, there are a few other commonly used tools to save for education. Some of the options are briefly described below.

529 Plans
The most commonly discussed education savings tool, is the “qualified tuition plan”, sometimes referred to as a QTP, authorized by U.S. Federal Internal Revenue Code Section 529. This allows individual states to create and maintain tax-free savings accounts for education-related expenses.  These accounts are funded with after-tax money, but the investment growth is tax-free when the disbursements are used to pay for “qualified” expenses such as tuition, fees, room and board, and books. These plans are no longer only applicable for college-related expenses. In 2017, the SECURE act expanded the definition of “qualified expenses” to include a yearly total of $10,000 towards those related to K-12 tuition, apprenticeships, and student loan payment per beneficiary. It also created the ability to roll-over 529 account funds into an Achieving a Better Life Experience (ABLE) account to help those under 26 years of age with disabilities set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI).

Other positive aspects for using a 529 plan may include; the ability to open an account immediately because there generally is no (or a low) minimum contribution, a high contribution limit, the ability to roll assets into another 529 plan for a different beneficiary, the ability to use any states plan, and some states allow contributions to the plan to be tax deductible.  Note too, that account owners can name anyone as the beneficiary. Relatives can create accounts and get the benefits of tax-free growth and disbursements as well. But be aware that disbursements for non-dependent students, unlike those from their parents, will be counted directly as income for that student, and subsequently assessed at 50% for financial aid awards. Meaning an $8,000 disbursement from a grandparent may trigger a $4,000 reduction in the student’s financial aid package. A way to minimize this impact is to waiting until January 1st of the 2nd college year so that it will not make it into the FAFSA calculation. Of course, this only works if the student will graduate in 4 years. There are a couple of other possible ways in which a grandparent may maximize their 529 account’s ability to help the student, depending on the plan guidelines. One may be to transfer ownership of the plan to the student or their parent. Another, is to consider paying up to $10,000 a year on a student loan after graduation.

Not all 529 plans are created equally. Each state’s plan has its nuances. And things can change at any time. Some quick online research, or consulting with a tax or financial professional, will help narrow down the choices to best fit the individual need.

Roth IRAs
Like 529 plans, Roth IRAs offer tax-free investment growth on after-tax contributions. Likewise, early withdrawals are allowed for qualified education expenses after funds have been in an IRA for at least 5 years. Unlike the 529 plans, however, the investor can choose to use the investments for education or keep them in the account for retirement. On the downside, Roth IRA’s have a comparatively low contribution limit. Furthermore, investments in any IRA will count towards the total amount of yearly allowable IRA investment. Using IRA funds should be done judiciously. And only when there is a minimal impact on retirement goals.

Custodial Accounts
The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) established custodial accounts as a way for adults to gift assets to children without having to go through the trouble of creating a trust. A custodial account created under the Uniform Gift to Minors Act (UGMA) is used for financial savings much like a bank, mutual fund, or other savings account. Funds placed in these accounts must be used ‘for the benefit of the child’, but control remains with the parent. As the name implies however, these accounts are for minors. Therefore, when the minor reaches the age of majority in their state, they gain full control of the account. Although these accounts do not provide the tax benefits of a 529 plan, the account holder has much greater flexibility in the investment options, and the investment growth is taxed at the child’s tax rate. Furthermore, the funds can be withdrawn without consequence as long as they’re used ‘for the benefit of the child’ and not necessarily for college expenses. For FAFSA reporting purposes, custodial accounts are assessed as the student’s assets and up to 20% of their balance is counted in calculating the Expected Family Contribution.

Prepaid Tuition Plans
Some states allow prospective students to prepay their tuition at certain state colleges or universities, thereby locking-in the cost. Obviously, this is only best when the student is sure of the college they will attend.

Coverdell Plans
Coverdell Education Savings Accounts are similar to 529 plans in that they are tax-deferred savings accounts from which qualified distributions can be taken tax-free. Coverdell plans typically offer a wider variety of savings vehicles than a 529 plan, which usually offer only a limited choice of mutual funds. However, the annual contributions are limited to $2,000 per year, per beneficiary and can only be made by households whose adjusted gross income does not exceed certain amounts; currently (2020) $110,000 for single filers and $220,000 for married couples filing jointly. Other limitations include the fact that the contributions can’t be claimed for deduction or credit and the savings must be used by the time the beneficiary turns 30.

Which Plan Should I Use?
These are just a few of the ways to mitigate the tremendous risk which education expenses can create to retirement savings. A successful ‘best strategy’ may be comprised of many of these options. Composing such a strategy will take time and thought, and is a process best started long before entering high school. This isn’t an easy endeavor, but there are many dedicated professionals which can help. A good place to start is the school counselor’s office. They can provide a thorough overview of the entire financial aid process and help set expectations. A college’s or apprenticing institution’s financial aid office can provide more specific information for their offerings. Seriously consider consulting with tax and financial professionals to craft a long-range savings plan.

For more information regarding choosing an education that best fits the students overall needs, see my series of articles at https://www.stepsfortoday.com/financial/having-the-other-talk-with-your-teen/.

As always, thanks for reading.  If you have a moment, please Like this page and consider sharing this post it with others. It’s greatly appreciated.
And remember to take the next step…

Mitch

Posted on

Having “The Other Talk” With Your Teen – Part 3

(about planning for their future)

In this series of articles I’ve asked students to reflect about their interests and natural inclinations while thinking about their choices for a life-long career. From there, we’ve taken a look at the different types of training available for a wide range of careers. We’ve also reviewed some of the resources available to help make their choice. In this article we’ll examine resources and processes available for helping make a financially sound decision.

 Most students want to choose an education that not only allows them the opportunities to explore their talents and dreams, but also will leave them in a financially strong position after school ends. It doesn’t take much knowledge of current events to know that repaying student loans has become a major issue in this country. There are several contributing factors for this phenomenon. Not the least of which is the students unfamiliarity with debt and the all-consuming impact it can have on life. A proactive parent would be wise to introduce debt to their children early in life. Perhaps we’ll explore ways to do this in a later post. But for now, let’s take a moment to understand the financial aid process and how it can best be used.

First, no matter which type of training your considering, the process begins with an application for enrollment after the student has chosen, and ranked, their leading choices. Although frustrating, ranking the choices is a factor in the schools financial aid offering. So give it serious consideration. A great research tool is the U.S. Department of Education’s College Affordability and Transparency Center, available online at https://collegecost.ed.gov/. There is a guided process for investigating colleges and matching them to the students’ needs and resources. Remember too, that college applications are a game of deadlines, and they’re pretty strict with them. Some institutions ask the applicant to write an essay, or perform additional tasks as part of the process. Don’t wait until the last minute. And don’t be a victim of confusion. I recommend creating a 3 ring binder containing the necessary application processes, paperwork, and deadlines. Using an online calendar can help keep things on-track as well. This is also a good place to keep notes of correspondence with the institution. Keeping notes on names, contact information, and conversations will go a long way towards insuring your sincerity.

Once you’ve received a letter-of-acceptance, the financial aid dance can begin. Just about every school now requires the online completion of a Free Application for Federal Student Aid (FAFSA), whether or not you’re even applying for federal aid. Why? Because it gives the school all the information they’ll need to evaluate the students (and their family’s) financial resources. If you haven’t been through a financial aid process before, then this will be somewhat intimidating. The form digs deep into personal finances to evaluate the households ability to pay for school. It also asks questions about the students demographics and the household in which they live. The earliest this can be done is October 1st of the preceding year. For example: Students wishing to attend college anytime from July 1, 2020 to June 30, 2021 should file the 2020-2021 FAFSA between October 1st, 2019 and June 30th, 2021. The tax information used for this filing would be from their 2018 taxes and can be automatically imported from the IRS database using its Data Retrieval Tool (DRT). Some schools may require additional information to that in the FAFSA, or another online questionnaire. The most common of which is the College Scholarship Service Profile (CSSP); created and maintained by the College Board. This profile is used to deliver non-federal financial aid. So be sure to understand what is needed, and its deadlines.

Once the information is received and analyzed, the school will send a packet outlining their financial aid offering. Here’s another place where things can get confusing. Understand that the term ‘Financial Aid’ does not universally mean money that does not have to be repaid.  Many institutions will list loans or work-study programs under ‘Financial Aid’ in their cost information. Be sure of what does, and what doesn’t need to be repaid. Earlier, I referred to the financial aid process as a dance. And here is the next step in that dance: Don’t assume that what is sent in their initial packet is the best and final offering. Students may increase the financial aid package upon appeal or discussion with their financial aid office. If you have concerns, just give them a call. In my experience, people working at schools really believe in their mission. If they know a prospective student is very interested, they will do their best to work with them. Along those lines, here’s another must: Show up and talk to everyone you can. If they’re having an open house, show up. If they’re hosting an event, show up. If invited to anything, show up and talk, talk, talk. Let them know that they’re making a sound investment with their money and time. This may sound simple, but it often works. With one of my children, every time we showed up, the school sweetened the pot. Along those lines, there are many private scholarship offerings available each year; in just about every discipline of study. Private companies such as FastWeb can help find these additional resources. And every dollar helps.

Now let’s talk about how to make a financially strong decision. First, don’t make the assumption that state schools are always more affordable that private institutions. It really does depend on the financial package that each school sends. With that said, don’t choose a more expensive school just because there are student loans available. Only do that if the degree from the more expensive school will get you substantially more pay than the same degree from the less expensive school. How do you know that? These number are out there. If you can’t find them on the internet, just as the placement office at the school what pay can be expected with the degree. Let’s put it this way. When graduating with just $40,000 of 9.5% interest student loan debt, it will take over 13 years of paying $440 each month to pay-off the loan. That makes the starter household budget really tight. Any serious evaluation of school costs must consider the long-term financial impact of the choice. And here’s where it gets real. Roughly, an investment with a 7% rate of return doubles every 10 years. Whatever your retirement goal, whether it’s $1, 2, or $10M, the math is the same…….by waiting 10 years to start your retirement savings, you’ll now have to more than double your monthly installment to meet your goal. And it won’t be any easier then. If you’ve chosen to join an apprenticeship program in which you get paid from the start of your education, you should start a savings program from the start.

For the Student, don’t just assume that ‘once you’ve graduated’, your education will provide you with the lifestyle you envision.  Do your homework. Understand your choices. Plan your steps for the life you want.

As always, thanks for reading.
And remember to take the next step…
Mitch

Here are some additional Career Education Resources

http://www.everygoodpath.net/economics101_collegevsapprenticeship/ Excellent article comparing College with Apprenticeship

https://mycollegeguide.org/blog/2011/04/vocational-school/

https://mycollegeguide.org/blog/2016/08/trade-school-vs-college/

https://www.edvisors.com/plan-for-college/benefits-of-college/school-comparison/

http://money.com/money/collection-post/2802161/how-much-save-for-college/

https://www.debt.org/students/the-true-cost-of-college/

https://www.foxbusiness.com/personal-finance/more-college-grads-are-moving-back-home

https://collegescorecard.ed.gov/

https://money.usnews.com/money/personal-finance/family-finance/articles/2018-02-12/the-problem-with-plus-how-parents-buckle-under-the-weight-of-college-debt

https://studentaid.ed.gov/sa/prepare-for-college/choosing-schools/consider/costs

https://nces.ed.gov/collegenavigator/ The National Center for Education Statistics College Navigator tool for investigating colleges: Grad rate, Avg cost, Avg % who get financial aid, Avg amt of financial aid

https://collegecost.ed.gov/ U.S. Department of Education College Affordability and Transparency Center

http://studentcaffe.com/afford/financial-aid-basics/estimate-out-of-pocket-costs

https://studentaid.ed.gov/sa/fafsa/estimate

https://fafsa.ed.gov/FAFSA/app/f4cForm FAFSA estimator tool

https://blog.ed.gov/2018/09/7-things-you-need-2019-20-fafsa/

https://cssprofile.collegeboard.org/

https://studentaid.ed.gov/sa/help/fsa-id

https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/expected-family-contribution-calculator

https://mycollegeguide.org/articles/paying-for-college/10-things-to-know-about-financial-aid

https://www.fastweb.com/ Private financial aid resource company

https://collegecost.ed.gov/netpricecenter.aspx

https://www.bls.gov/bls/blswage.htm

Posted on

Having “The Other Talk” With Your Teen – Part 2

(about planning for their future)

My last article asked students to reflect about their interests and natural inclinations while thinking about their choices for a life-long career.

When first discussing career choices the prospective student will grow weary of the phrase “best fit”. This is usually taken to describe the school at which the student will be most comfortable. Somewhere in its definition, however, it should include finding the education that “best fits” the students (and parents) long term financial goals.

But for this post, we’ll look again at some of the educational options.

Free training – Never underestimate the power of self-initiative. It just may be the single most important quality that many employer are seeking. Free training for just about any career can be found on-line. I have worked with highly skilled, self-taught employees in a wide variety of disciplines. Finding  a job without career placement assistance can be a challenging obstacle for those pursuing a self-taught career. Use seminars, professional organizations, or events to begin networking early with those in the industry. You may even find a mentor to assist your pursuits. For more information on self-taught careers take a look at https://careertrend.com/jobs-can-self-taught-7970.html.

Internships are paid or unpaid, short-term, educational training programs typically offered to undergraduate students seeking to learn a little bit more about a type of industry before committing to a specific career-path; while gaining work experience and confidence. At the end of the internship, there is are no expectations for a job offer. Internships can be a great way for students to receive training and pick up some cash for their educational pursuits.

Apprenticeships offer the benefits of education, hands on experience, and pay. A tried-and-true standard for the building trades, now healthcare, hospitality, IT, and other industries are embracing apprenticeships as a viable option for obtaining a skilled workforce. There is a great amount of time, effort, and resources training an apprentice. The intention is to create a highly-skilled employee to which the company is confident to offer a job. A great benefit for the apprentice, is that they begin getting paid while they are being trained. This gives them an opportunity to start saving money, and starting their life without the debt that is often associated with trade school or college. For more information on apprenticeships, check out https://www.apprenticeship.gov/. For information regarding apprenticeships in the building trades take a look at https://aflcio.org/about-us/careers-and-apprenticeships, https://www.abc.org/Education-Training/Craft-Training-Apprenticeship, or https://www.ieci.org/apprenticeship.

Vocational or trade schools offer training for a specific career. Their coursework does not require general studies classes and can be completed in a much shorter time. Trade schools may offer an associate’s degree, a certification, or another document to signify completion of their program. If you think this may be a good fit, see https://mycollegeguide.org/blog/2011/04/vocational-school/ for a list of the ever-increasing number of careers that can be started via vocational school training. Vocational training may be facility-based an hands-on, or it may be online training only. Vocational schools offer some kind of document or certificate at the completion of their coursework. But use caution in choosing the school or program. Many schools are not accredited or licensed by any agency to verify that their programs meet an industry standard. Take time to read the schools offerings, but also research their credentials and reviews. Not doing so may leave you with a lot of debt and no career. For more information about choosing a vocational school see https://www.consumer.ftc.gov/articles/0241-choosing-vocational-school.

Community colleges are smaller colleges usually offering 2 year, and sometimes 4 year, degrees. With the proper accreditation, the college hours earned at these colleges will transfer to a 4 year college and apply towards a bachelor’s degree. Often appealing to students because of the lower tuition and the ability to live at home while taking coursework, attending these colleges can dramatically reduce the cost for a 2 or 4 year degree.

College degrees have become a standard requirement for many employers. As it is with trade schools, a 2-year associate’s degree may be all that is necessary to begin work in a specific career. Often, however, a 4 (or 5) year bachelor’s degree is required for an entry-level position. Pursuing a four year degree gives students who are unsure about their career choice, time to investigate their options and interests. And although some trade schools can be equally as expensive, the cost of a college degree   is typically the most expensive choice for career training. With that said, the difference in costs for similar degrees received at different institutions can be staggering. Researching the options is a big task that will seem overwhelming to the prospective student. They will need guidance with the process (and its related frustration). But this is their future and they need to be armed with enough knowledge to make a good decision. Starting early with the process will set expectations, ease frustration, and help avoid making a last-minute decision. Here are some good websites to get an review of the overall process:

Whether you’re a student lucky enough to know exactly what you want to do in life, or whether you’re unsure of your interests and need more time and guidance, then I hope you now see there are many tools and educational options available to help you reach your goals.

Finding the ‘best fit’ may seem like an insurmountable problem. But hey….many of life’s issues seem that way at first. This is the great part of becoming an adult. Learning to make decisions for yourself. It’s not easy. But it the challenge can be fun.

The next post in this series will examine key financial drivers for educational choices. This is a tough conversation. Both parents and students would like to be able to completely fund the pursuit of dreams, wherever that leads. But there are financial realities that must be considered both during, and after, your training; as you step into life after school. We’ll expand on understanding the financial assistance programs available for each of the choices. We’ll also look at some of the processes college applicants must now go through; whether or not they can expect financial aid. This is a key component of making a quality ‘best fit’ decision. It will also contain additional resources for the application and financial aid processes. So you won’t want to miss it!

As always, thanks for reading.
And remember to take the next step…
Mitch

Posted on

Having “The Other Talk” With Your Teen

(about planning for their future)

It’s that time of year again. When young students are asked to start thinking about their future.  There are so many questions they may be asking themselves. Questions like:

  • What do I want to do when I graduate high school?
  • Do I think trade school or college is best for me?
  • Which school is best for me and how do I find it?
  • What are the costs of my decision?

These are the typical questions which begin conversations of self-discovery.  Students mostly turn to their parents or school counselors for help finding answers. Some teens know exactly what they want to do. Some are still searching for their interests. Some have thought about it for years. Some haven’t really given it much thought at all. But most, have had very little practical experience with the adult choices of life. And, although they may be eager to get started, they probably could use a little guidance on organizing their thoughts on what to consider.

I like to believe that all parents want their children to succeed in life. The difficult part is guiding them to define their version of success.  Some may want to go to college and explore a their options while earning a degree in general studies. Other’s may know exactly which trade school they’d like to begin. But not many of them understand the stifling impact which debt can have on their life. With that in mind, starting conversations with a different line of questions may help with this process. Below are questions which they can ask themselves to help determine what really interest them.

  1. Do I enjoy working with my hands?
  2. Do I like building relationships with people?
  3. Do I think I would prefer working indoors or out? Always in the same location, or at varying locations?
  4. Do I think that I may wish to own my own business one day?
  5. Why do I want to go to college or into the trades?
  6. For whose future am I working so hard? Am I trying to fulfill what I believe my parents want of me?
  7. What are the pros and cons of college versus an apprenticeship?
  8. Whose job is it to pay for college, and for how long?
  9. What is the average college debt and how would that impact my life after college?
  10. What schools fit within my goals? How does their program rank in comparison with other schools offering the same degree?
  11. What are the pros and cons of community colleges?
  12. What are realistic expectations for income and living expenses during, and after completion of, my studies?

These are big questions with complicated answers. Yet their impact may last a lifetime. Indeed, helping your child organize and plan their future will be a major step in their growth towards independence and success. I recommend starting these discussions early in high school. Waiting till college discussions are underway may seem less like guidance, and more like an attempt to push away from already formed expectations. Discussing plans early, and often, doesn’t mean they can’t be changed. Indeed, it gives them more flexibility as new information is explored and expectations change.

Having a discussion with your student about the 12 questions above is a great place to start. It will begin the discussion and let them consider the different choices for their vocational education; without getting too far in the details. Here are a couple more resources to consider:

https://www.entrepreneur.com/article/316320 Trade School vs. College: Which Is Right for You? (Infographic)

https://www.thebalancecareers.com/best-trade-school-graduate-jobs-4125189

The next few articles will go deeper into these questions. We’ll do an analysis of the short, and long-term, financial impact of each choice. We’ll also look at the next steps and provide some tools to get started. But for now, the next step is just to have a conversation and write down some thoughts. I recommend asking the student to keep a notebook dedicated for this process.

I’m always looking for feedback. Please don’t hesitate to respond with additional thoughts, concerns, questions, or suggestions regarding this topic

As always, thanks for reading.
And remember to take the next step…
Mitch