Everything You Need to Know Before You Send your Kid to College

Getting a Head Start on College Savings

Take advantage of time. 

The time value of money is the concept that the money in your pocket today is worth more than the same amount will be worth tomorrow because it has more earning potential. If you put $100 a month toward your child’s college education, after 17 years’ time, you would have saved $20,400. But that same $100 a month would be worth over $32,000 if it had generated a hypothetical 5-percent annual rate of return. The bottom line is: the earlier you start, the more time you give your money the potential to grow.

Weigh your choices. 

There are a number of federally and state-sponsored, tax-advantaged college savings programs available. Some offer prepaid tuition plans, and others offer tax-deferred savings. Many such plans are state-sponsored, so the details will vary from one state to the next. A number of private colleges and universities now also offer prepaid tuition plans for their institutions. It pays to do your homework to find the vehicle that may work best for you.

Financial Aid for Students

FAFSA

"The Free Application for Federal Student Aid (FAFSA) is the single most important form you need in order to secure financial aid from the federal government." Each year, roughly 17.6 million students file their FAFSA and receive a combined total of more than $112 billion in grants, work study, and low-interest loans from the U.S. Department of Education. 

"Gift Aid"

Grants and scholarships are often called “gift aid” because they are free money – financial aid that doesn't have to be repaid. College-bound students can learn about grants and scholarships in several ways, but the most-effective strategy starts with contacting the financial aid office at the college or university you plan to attend.

Have you taught your children how to manage money?

Have the conversation. 

Many everyday transactions can lead to discussions about money. At the grocery store, talk with your kids about comparing prices and staying within a budget. At the bank, teach them that the automated teller machine doesn’t just give you money for the asking. Show your kids a credit card statement to help them understand how “swiping the card” actually takes money out of your pocket.

Let them live it. 

An allowance program, where payments are tied to chores or household responsibilities, can help teach children the relationship between work and money. Your program might even include incentives or bonuses for exceptional work. Aside from allowances, you could create a budget for clothing or other items you provide. Let your kids decide how and when to spend the allotted money. This may help them learn to balance their wants and needs at a young age when the stakes are not too high.

Teach kids about saving, investing, and even retirement planning. 

To encourage teenagers to save, you might offer a match program, say 25 cents for every dollar they put in a savings account. Once they have saved $1,000, consider helping them open a custodial investment account, then you can work with us to teach them how to research performance and make smart investment choices. You might even think about opening an individual retirement account (IRA). Some parents offer to fund an IRA for their children as long as their children are earning a paycheck.

As you teach your children about money, don’t get discouraged if they don’t take your advice. Mistakes made at this stage in life can leave a lasting impression. Also, resist the temptation to bail them out. We all learn better when we reap the natural consequences of our actions.

Strategies for Managing Student Loan Debt

• Revised Pay As You Earn Repayment Plan (REPAYE Plan)
• Pay As You Earn Repayment Plan (PAYE Plan)
• Income-Based Repayment Plan (IBR Plan)
• Income-Contingent Repayment Plan (ICR Plan)

You may be eligible for one or more of these payment choices depending on the types of student loans you have, your family size, your income, and certain other factors.

Under these income-driven repayment plans, any remaining loan balance may be forgiven at the end of the payment period. Payment periods vary depending on the payment option you enroll in, but typically range between 20-25 years.

We can help you to determine which of these income-driven repayment choices you might be eligible for.

Public Service Loan Forgiveness 

Certain federal loans may be forgiven after 10 years of qualifying payments if you take a job with federal, state, or local government; a non-profit; or certain other public service organizations.

Volunteer 

There are a number of programs, such as AmeriCorps, Peace Corps, and the military, in which service may accrue a benefit that reduces an outstanding loan balance in an amount that varies depending upon the program.

Pre-Pay Principal

Pre-payment of principal may help lower the lifetime interest costs of a loan. To raise cash to fund pre-payments, one idea is to ask that birthday and holiday gifts be cash to put toward pre-payments. You could also direct any raises, bonuses or overtime pay to pre-payments. If you do pre-pay principal, be sure to target the loans with the highest rate of interest.

Loan Consolidation 

You can consolidate your federal loans through the Direct Loan program, or through a private lender if you have private loans. However, this may only make sense if you can obtain an overall lower interest rate.

By planning ahead and consulting with us, you can help tackle the financial obstacles of your child's higher education – and smooth the way for them to pursue their dreams!

-Ken Brown & Michelle Kessel-Harbart

1. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk. Actual results will fluctuate. Past performance does not guarantee future results.

2. The tax implications of education savings programs can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.

3. CollegeData.com, 2023

4. StudentAid.gov, 2023

5.  EducationData.org, August 20, 20236. EducationData.org, August 27, 20237. Once you reach age 73 you must begin taking required minimum distributions from a Traditional Individual Retirement Account in most circumstances. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Contributions to a Traditional IRA may be fully or partially deductible, depending on your adjusted gross income.8. Credible.com, June 5, 2023

This information has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the information, however, the accuracy of this information is not guaranteed. All investing is subject to risk, including possible loss of money you invest. Diversification does not ensure a profit or protect against a loss. The information provided in this commentary is for informational purposes only and is not a solicitation to buy and/or sell. Investors must consider the investment objectives, risks, charges and expenses of any investment carefully before investing. Avisen Wealth Management (Member FINRA/SIPC) does not provide tax or legal advice. Please consult your accountant &/or legal counsel for guidance. Avisen Wealth Management, CA Ins License #0E52062