529s Are NOT For Everyone. Keeping The Lid on Tuition Costs.
I normally don't give out this kind of advice, as I limit my practice as an advisor to portfolio management. But this issue has become so raw, I thought I would share what I've learned about controlling tuition costs, which for many, have gotten completely out of control. In fact, I am shocked at the utter recklessness being exhibited. I can excuse the students- they've never run a household before, or managed their own finances. But the parents should know better, and step in with some forethought. For me, I was determined that I would not send my children into the world with such a burden on their shoulders. No loving parent should. First, I was surprised to find that millions of parents had never even bothered to file a FAFSA aid application. The aid calculus is based on the parents' assets, earnings, age, and most important, the child's assets. If you have two children attending at the same time, which is common, the aid package will be greater. By all means, apply. You don't know what you will qualify for until you do. If you're considering funding a 529 plan, or already started one, and you're a person of modest means, those assets count more against you than if they were owned by the parents for aid purposes. So if you're not in high tax bracket, avoid it. Keep savings under a parent's name. Moreover, these plans mirror my biggest complaint about the way 401(k)s are managed: investment choices are limited to a handful of mutual funds, and the student is subjecting the tuition nest egg to market risk, as people ruefully learned after the dot-com bubble and the Lehman debacle. So you're probably better off funding a dedicated account in the parents names with more predictable investment outcomes. Next, school shopping. Too many people (and regrettably some HR departments) look for a school's “branding,” as if they were comparing BMWs to Chevrolets. Some of the lesser regarded schools aren't necessarily inferior. You have to weigh a genuine cost/benefit ratio to making this decision. At the same time, don't worry if you're disappointed after the first semester. The student turnover rates at this time are surprisingly high, and you're hardly alone in your “buyer's remorse.” With your FAFSA already filled out, you can make the switch with more predictability, and with (hopefully) good grades to show, the succeeding school may kick in some aid incentives to persuade you to move over. They want better performing students. Which brings us to another point. Some schools are in desperate need to fill seats, and like the airlines, will discount in order to “fly full.” One college we rejected called us back, and immediately offered to lop off $5000 in tuition. We didn't take the offer, but don't think that every school has a line out the door. This strategy works best when it's crunch time on attendance decisions. Once the student has moved into the dorm, the loan(s) you signed for will now be disbursed to the institution. Here are two important strategies to follow: First, try not to float the entire tuition cost, because it seems to me that a great many people are doing just that, and then crying poverty after they graduate. It seems many students graduating from our most prestigious institutions have little knowledge of the power of compounding. Kick in what you can. Think of this as a down payment on a house. You want to put “equity” into the student's education. I've done both. Some semesters I've floated loans, other times, I just wrote a check, or a partial amount. Depended on my circumstances. Second, and this is a proven way to keep the devil from your door: even if it's a meager amount, as little as say, $200 a month, start servicing the loans the minute they're disbursed. Remember: no lender can charge you interest on money you don't owe, so doing a pre-emptive strike as soon as possible will pay off handsomely. This will keep a lid on compounding throughout the years of the student's college attendance. Some loans, like the Perkins Federal Loan, don't start accruing interest until a few months after graduation. That's a sweet deal. However, those terms can lull you into complacency, so stay aware of them, and be prepared to tackle them, by making sure the funds are there to pay them off. Lastly, remember to pull the 1098-E form to hand to your accountant to deduct the interest on the loan, if you're qualified. A little planning can make your life- and your children's- more secure. Your children are not fated to a life of indebtedness.