In my first part on this, we looked at the problem of rising college costs. I believe we are at a point where students must “do their homework” before taking out a college loan. You want to be sure that you will get a good return on your investment and be able to pay it back easily. Ideally, you’d like to NOT take a loan at all. College is now a “business” decision, not a right.
I wouldn’t be a good advisor to bring up a problem without mentioning some viable solutions. There are enough good ideas, that I will talk about a few now and a few more in my next piece. None of these are magic – but if you apply these common sense ideas you’ll be better off than doing nothing. So here are some ways to
Make College More Affordable.
* Saving in a 529 or UTMA plan (regularly)
The key word here is “regularly”. You can set up either of these plans as soon as your baby is born. (And I highly recommend that!) Did you know that if you were to save $100/month for 18 years (216 months) at an average return of 8%, you’d have saved $46,865? And $200/month over the same period = $93,730.
The 2 plans are different, but the idea is the same. The 529 http://en.wikipedia.org/wiki/529_plan
allows for tax-free withdrawals for college related expenses. Here in Indiana, since 2007, you can also get a 20% tax credit on any contributions to a 529 plan. Put in $5000 and you get $1000 back in the spring. Also, money can be transferred between family members. If it isn’t used for college, you are simply taxed on the growth at withdrawal.
UTMA (U -T – M – A ….you ain’t got no alibi, its UTMA!) OK, so I should give up on ‘cheerleading’ – but I couldn’t resist. This is the Uniform Transfer to Minors Act. A parent or guardian acts as a “custodian” for an account in the child’s name. http://www.fairmark.com/custacct/regret1.htm until the child reaches age 21. At that time, the money is turned over to the child. This is also counted in the child’s assets when you go to apply for financial aid later.
One advantage that someone may see in the UTMA is that it doesn’t matter if the money is used for college or not – although there are no tax benefits. They have full control over the money.
Personally, I prefer the 529 plan (for the tax benefits) and have set one up for both of my daughters. Whichever plan you choose (talk to your advisor) the most important thing is to save something regularly.
Another note here – a common question I get is whether families should contribute to retirement or college.
If you must choose – retirement savings trump college. ‘Nuff said.
* Part Time Work
Wow, real genius stuff here, Dean! I told you this wouldn’t be ‘magic’. But think about this. I believe students should learn the value of a dollar – and appreciate the value of education. When I was in High School, I cleaned tables and washed dishes for a local family restaurant. Part of my pay went into my ‘college’ account.
Currently minimum wage for “flipping burgers” is $7.25/hour. What if Johnny flipped burgers for 3 years at Mc Donald’s and put $400/month into his college savings? In 3 years, Johnny would have saved $14,400.
Between this idea and the last one, we’ve put a good dent into Johnny’s college costs, and haven’t even gotten to financial aid yet.
Not able to save as much as we’ve talked about? Getting started ‘late’ with savings? What about putting off college for a year or 2, to build up savings. There is no law that says YOU MUST enter college immediately after high school. (I checked). In fact, chances are very good that Johnny (or Jill) may be more mature at 20 and get more from their college experience, having spent some time in the “real world”. I’d much rather see Johnny (or Jill) wait a bit and not be burdened with debt after they graduate. If they do this, they must focus on the idea that college is still in the plan – flipping burgers is only temporary.
* Go to School, Live at Home
Being in the Chamber, I often attend networking events. Recently I had a chance to visit IUSB (Indiana University at South Bend). I was very impressed with the quality of the facilities and was very surprised to learn that their enrollment exceeds 7500 students. http://www.iusb.edu/about/ (You may have heard there is another school here in South Bend). People are saving quite a bit by having Johnny and Jill live at home while going to college.
Because IUSB is affiliated with Indiana University, many programs are similar. For those not living in this area, I would be willing to wager that you have a similar local university nearby.
In the next article I will continue to explore some other ideas which can help make college more affordable.
You can contact me at www.helpmy401k.us and follow me on Twitter at www.twitter.com/deanvoelker.
My weekly Blog Talk Radio program, “Improving Your Financial Health” is at http://www.blogtalkradio.com/401kcoach.