I’m happy to announce that this week I have a guest writer on my blog, my husband Jonathan Fredette. Following is his article on paying for college.
Paying for College
OK, so here are two disclaimers I want to start with:
- I am not a financial adviser. I’m a social worker. And while my work at times ranges into the area of helping people with their money, as far as formal training goes, I’m just as qualified to give you advice on how to pay for your kids’ college as I am to tell you how to be a good astronaut.
- The first of our four children is a senior in high school this year. So if you really want to make sure I know what I’m talking about, come see me in about 10 years! Or better yet, talk with someone who has successfully navigated to the end of this journey, in addition to people like me who are just bracing for the beginning of it.
But with that aside, this is an area where Gwen and I have spent a good number of years thinking and praying and preparing, and I think there are some good principles we’ve come across that are worth talking about. Here are a few that come to mind:
Minimize your debt. This one is easier said than done, but it might be your most important strategy over the long term. Most of us are not in a position to completely avoid debt our whole lives. Mortgages, car payments, and student loans may be necessary, but the questions of what, when, and how much are critical. Don’t let a real estate agent or a car salesman dictate to you what you can afford. Over time, the money you can save on principal and interest by choosing a slightly smaller house or a vehicle without all the bells and whistles, could easily multiply into several thousands of dollars. Always check your motivations before making a major purchase, and if you’re choosing something you want rather than need, make sure that what you will really be paying in the end is worth it.
Develop a budget and stick to it. Few of us get excited about a budget, but having one is really the only way to get a clear understanding of where your money is going. If you’ve ever committed to doing this in the past, you probably discovered some things about your spending habits that really surprised you. Think of it as an opportunity to sit down as a family and make deliberate decisions about what is really valuable to you, including your children’s education. And by the way, the point of a budget isn’t to try to pinch every nickel and dime, or to make a vow of poverty. If you’ve planned ahead of time how much you’re going to set aside on that vacation, or for going out to dinner, when the time comes it actually allows you to spend the money without feeling guilty, or worrying about whether you can afford it.
Investment options. So if you are saving money for college you need to decide what to do with it. Of course, just putting your money in a bank account and leaving it alone works, but there are options out there that can give you a better return on your investment without necessarily exposing you to a lot of risk. Several banks and investment companies offer Education Savings Accounts (also called 529’s ) that allow you to set aside money in the child’s name, and the interest earned on the money won’t be taxed, as long as it’s used for education. Most of these have a choice of several different kinds of investments, and some of them have funds that will take the child’s age into account, and become more conservative as the child gets closer to college age. Most states have sponsored programs (Pennsylvania’s is called the Guaranteed Savings Program) that allow you to invest money at current tuition rates so you save on the cost of inflation every year. Many states also offer you an income tax break on money you invest in a child’s 529 account. So in Pennsylvania that means you could gain more than 3% on the money you invest right off the bat. You also may be allowed to use some of your retirement savings for your children’s education, but be careful when using this option, because there are a lot of rules that need to be followed to avoid paying extra fees and penalties.
Tax credits. If you do your own taxes, make sure you educate yourself about the available credits for college expenses. The largest of these is the American Opportunity Tax Credit, but there are others. If someone else does your taxes, make sure they have receipts from you for what you’ve spent on education over the past year.
Credit card rewards. If you have ever gotten in trouble with credit cards or think there is a danger that you could, SKIP THIS ONE!! The benefit would probably only be a few hundred dollars a year at most, and if you’re carrying even a small, lingering credit debt, it would wipe out that gain and then some. But if you’re disciplined in paying off your entire monthly balance on a regular basis, there are credit cards out there that will give you money back that can be invested directly into a college account. (A simple Google search of “Credit cards with college savings plans” will give you some options.)
Don’t be afraid to have your child work to help pay for school. Some parents either can’t, or choose not to help their children financially with college. That usually creates a tough road for a student, and we all know people (or maybe are people!) who graduated school with a mountain of debt. The other extreme is for parents to insist on paying every penny of college, and to allow students to use most of their own money on non-essentials like entertainment. While most kids would be happy to take this option, it comes with potential pitfalls, including developing some bad habits if kids get used to working little and spending much. Having your students work part time and then contributing a portion of what they make toward the cost of college not only takes a little of the burden off you, but it might also help develop a greater sense of responsibility, and an appreciation of both the cost and the worth of an education.
Written by Jonathan Fredette
Posted by Gwen Fredette on February 23rd, 2015