Paying for College: 5 Steps to Take Control
By Joe Messinger, CFP®
August 11, 2017
A state of affairs
Did you see this headline “We’re No. 1, and that’s bad” in the Dispatch? …Ohio ranks worst when it comes to college students in debt. Paying for college is at a real crisis point, but hardly anyone has a solution. They only report the problem.
Some of the hard facts from the article:
Average student debt: $30,239
Proportion of students with debt: 66%
Student debt as share of income: 54.7%
Share of student loans past due or in default: 13%
Share of student loan borrowers 50 or older: 8%
Jobless rate of those 25 to 34: 5.6%
A spokesman for the Attorney General said “…the key for students and their families is to find ways to borrow less money for college.” He went on to say, “If you take out less of a loan, it is easier to make loan payments on the back end when you graduate.”
WOW! Bombshell there! (Sarcasm) We know he means well, but for most families this statement–“simply borrow less”–provides absolutely no solution.
Another proposed solution?
As part of the budget passed by the State of Ohio, “the maximum deduction for contributions made to Ohio 529 plans increases to $4,000 (from $2,000) annually for each beneficiary.”
In the past, you could take a deduction on your state taxes for investments in the Ohio 529 up to $2,000 per year. Now, a family can invest up to $4,000 and receive a larger deduction.
Let’s see how those numbers work out.
|$150,000 personal annual income||$150,000 personal annual income|
|2 working parents||2 working parents|
|Family size of 4||Family size of 4|
|529 contribution = $2,000||529 contribution = $4,000|
|Annual tax savings = $87||Annual tax savings = $175|
Increasing the contribution will hopefully encourage families to save more if they can afford it. Any additional money saved will have a higher return. However, the additional $88 tax savings won’t make an impact on the big picture.
(As a reminder, your 529 contribution is not capped at $2,000 or $4,000. These amounts are the maximum you can deduct on your state taxes.)
Take the power in your own hands
Waiting for the powers that be to solve the problem is not a solution for those sending their kids off to college soon. Things are not going to change in time if you have a student now.
We need to end the student loan debt crisis one family at a time.
5 steps to take control:
1. Save what you can and start early
Most families will not be able to save enough to pay the entire bill. We understand. But every bit will help.
Take advantage of the tax deferred benefit of 529 plans. Understand how they work and how you can use them. (Check out a previous blog for 11 secrets you might not know.)
2. Learn, learn, learn
A side comment here about workshops…know your presenter. Take a hard look at presenters whose main motive is selling a commissioned financial product. You need knowledge and guidance not a sales pitch.
An important question to ask is if they are a “fiduciary”. A fiduciary is a person who must place the client’s best interest ahead of their own. Although it may seem that all advisors operate this way, it simply is not the case. Fiduciaries must disclose how they are compensated and any conflicts of interest or potential conflicts of interest that may influence the consumer’s decision to utilize their services. Check out this Forbes article with 10 great questions to ask a financial advisor before engaging their services.
3. Family plan
Pull all the pieces together into an all-encompassing plan. These parts include:
- Ways to earn college credit before college starts: Advanced Placement (AP) and International Baccalaureate (IB) courses, College Credit Plus or Dual Enrollment coursework
- Assets: How much can you save? Do grandparents want to gift money?
- Scholarships: Students need to understand the impact of their grades and test scores on financial aid offers.
- Grants: Will your family be eligible for need-based aid?
- Cash flow: How much do you spend on your child each month now? Can that monthly amount be used for college?
- Tax credits: Use those that apply to your personal situation.
- Student loans: Prioritize federal loans over less flexible and frequently more costly private loans. Use loans only to cover any gap. Remain cognizant of the total 4-year loan amount you are going to incur. We always recommend a debt amount not exceeding the expected first year’s salary after graduation.
4. Choose a college you can afford
This choice is where we see the best laid plans go astray. Your little baby visits an expensive school, falls in love, and parents cave.
The best college fit for your student HAS to include a price you can afford with a student loan debt amount after graduation that your student can manage. The results of too much student loan debt include not being able to save for retirement, a home, or their own children’s education. And the dreaded “boomerang” back home to your basement.
5. Consider working with someone
If you are having trouble, consider working with an expert. Sometimes you just need help from a trusted advisor. As noted in number 2 above, always understand how they are compensated, their credentials, and if they act as a fiduciary.
With a strong plan in place, paying for college will not get you in over your head with debt. Don’t wait for the government to solve the high cost of college problem. (They very well never will.) Take control and have a plan.