College Planning Archives - The Free Financial Advisor

A Systematic Approach to Goals

December 25, 2019 by Jacob Sensiba Leave a Comment

With 2020 staring us in the face, it’s time to review goal setting and the systems you can put in place in order to reach those goals.

“A goal without a plan is just a wish.” – Antoine de Saint-Exupery

That said, let’s look at systematic ways to approach goal setting and actionable tools you can use to smash those goals.

How to begin

Large/Lifetime goals – These are things you want to accomplish throughout your life. They can be philanthropic, health, financial, etc. Figure these out first.
Short-term – Now that you have your long-term/lifetime goals determined, you can break them down into shorter-term goals. Consider these stepping stones, and a lot of these will change as you age. For example, your philanthropic goals. There may be causes you care deeply about now, but that can change.
Actionable steps – Once you have your lifetime goals broken down into manageable targets, it’s time to create steps to get there and I’ll illustrate that using the three examples above.
1. Philanthropic – Research causes and charities. Pick the ones you most identify with. Review your budget to find out how much you can give. Do a little more research to find out if your donations are tax-deductible (most, if not all, should be).
2. Health – Establish the specific reason you want to be healthier (for yourself, your partner, your kids, grandkids, etc.). Research a diet that could work for you. Research an exercise regimen that could work for you. Consult experts (i.e. nutritionist and personal trainer).
3. Financial – Create a budget/spending plan. Cut expenses. Save for emergencies. Insure you and your belongings. Save for retirement.

Here are a few articles I’ve written in the past about financial goals:

Worthy Goals For You To Set And Crush

How Do You Set Financial Goals?

Systems

We can think of systems as the sub-category of actionable steps. A routine is another word for it. When it comes to goals and habits, you can’t rely on will power. You have put a plan in place to do the work for you.

Take exercising for example. You need to create low barriers for yourself. Wear your gym clothes to bed or have your bag packed the night before.

If you go to the gym, put your bag and your keys in a place where you have to pass them to get to your car.

If you exercise at home, have your routine and your equipment laid out and ready for you.

Habits

When it comes to creating habits, James Clear, the author of Atomic Habits, likes to break down the habit into bite-sized pieces.

For example, if your saving for a down payment, go to your banking app and transfer $1 from checking to savings every morning (or whatever amount is realistic for you).

When that becomes second nature, bump it up a dollar a day.

Another thing that James says is, “People ask me all of the time, how many days does it take to create a habit? My answer, all of them because if you stop doing it for one day, it’s no longer a habit.”

External versus Internal

This section is speaking specifically to mental health versus other goals. You could also consider physical health as an internal goal, but for this article internal relates to mental health.

There are several things you can do to work on your mental health. See a therapist, exercise, and start a journal. Those three are low-barrier, easy things you can implement into your day to help.

Meditation, medication, and other forms of mindfulness training/practice can also help. There’s a podcast that I listen to regularly called “10% Happier” that will help you with establishing a meditation practice.

Do some research about this. Meditation can and will take many different forms, and not each modality will be right for you. Reading has also proven to have meditative benefits.

Financial Goals

It really is up to the individual as to what they consider, short, medium, and long-term, but my definitions are as follows: Short-term – less than 3 years. Medium-term – 3-15. Long-term – 15+.

My definitions are almost entirely based on the investability of those assets for that specific time period.

Short-term – Emergencies, a new car, what have you. This is money you will need soon, so risking it in the stock market is out of the question. High-yield savings accounts should be your go-to in this scenario.
Medium-term – Things like down payments for a house or sending your kid to college. What you’re saving for will dictate the vehicle that you use. If it’s saving for college, a 529 or a Coverdell ESA should do the trick. If it’s for a down payment, your best bet is usually a taxable brokerage account, as there are no fees for early withdrawal.
Long-term – This should be strictly focused on retirement. Assets should be in a retirement account(s) and invested (investment selection should be based on risk tolerance and time horizon).

Once you’ve established your short, medium, and long-term goals you can break them down into actionable steps as we talked about earlier.

Wrapping it up

Each New Year brings about resolutions that we hope to achieve. Whether it’s getting in shape or paying down debt, your barometer for success should be progress and consistency.

Are you in a better place than you were on January 1st? Do you have more saved? Are you still committed to the goals you set in the first place?

Yes. It feels great to set a target and hit it, but as far as I’m concerned, if you’re better than you were yesterday, that’s all that matters.

Take it one day at a time and keep your eyes on the prize. You got this!

What Can a Student’s Bank Account Say About Them?

December 3, 2019 by Susan Paige Leave a Comment

If you’re interested in college, you probably already know that it’s likely going to be very expensive. Although it’s possible to find scholarships and even get grants for housing, transportation, and food, it’s not guaranteed, and it’s rare to get out of college with no debt at all. That means many college students end up living paycheck to paycheck, which can be a pretty significant burden. If you want to learn more about how college might impact your finances, you might want to ask one simple question: How much money do students tend to have in their bank accounts?

Most Students Have Less Than $2,000 Right Now

When it comes to the basic numbers, 57.1% of respondents indicated that they had less than $2,000 in their bank accounts. As asked by OneClass, this question regarded both checking and savings accounts, which means that these students had less than $2,000 in available funds overall.

That’s an extremely low number — it’s definitely less than the suggested “emergency fund” of 3-6 months’ worth of bills. In some areas, it might be as small as one months’ worth of bills. Because the survey covered 82 schools, it’s impossible to say how dire these students’ situations are, but regardless of the area, it’s an unfortunate response.

A Substantial Amount of Students Have Less Than $500

Though it may come as a surprise that over half of all students have less than $2,000, the numbers get even more dire when you break them down further. 13.5% of respondents indicated that they had $0-$50, and 22.8% responded $51-$500.

That’s 36.3% of students surveyed — over one third — who indicated that they had less than $500. $500 is barely enough to cover an emergency car repair, and that’s cause for alarm. And when juxtaposed with the students who indicated having $2,000 or less, it’s even more telling. $500 is 25% of $2,000, but in fact, 63.6% of that body actually indicated having $500 or less.

Mathematics and Business Majors Tend to Be More Well-Off

In a result that probably won’t surprise you, Mathematics and Business majors reported the highest average amount when compared to other majors. Both majors most commonly reported having $2,001-$5,000.

When it comes to the median amount, the results are even more drastic, as Mathematics majors jump to $10,000 or more and Business majors move up to $5,001-$10,000. Because Mathematics and Business majors have a reputation for being more expensive, it may be that more well-off people move into those majors, causing those majors to report better finances.

Third-Year Students Are the Worst Off Overall

Overall, people’s finances tend to worsen as they continue college. First-year students most commonly reported having $2,001-$5,000, while second and third-year students both most commonly reported having $51-$500.

When moving to the median responses, second-year and first-year actually switched places — second-year respondents indicated a median amount of $1,001-$2,000, and first-year students replied with a median of $501-$1,000. But third-year students actually had a worse median response, with a median response of $0-$50.

Conclusion

You can’t draw any super definitive conclusions from just these numbers. There are of course plenty of extenuating factors that might play into these numbers. Maybe a student just received a grant, or maybe they just paid bills. But the truth is, when you look at the overarching picture, it’s much easier to see the wealth disparity.

Of the 399 students who responded, less than 100 had more than $5,000 available, which is likely the amount that one should have in case of emergencies. That’s a big deal. Whether you’re planning on going into college, you’re in college right now, or you just want to keep an eye on overarching financial trends, these are numbers you should definitely pay attention to.

What is the Coverdell ESA?

May 29, 2019 by Jacob Sensiba

Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
These accounts are self-directed, so your investment options are plentiful. They include…
- Age-based funds
- Static mutual funds
- ETFs
- Stocks
- Bonds
- Real estate

Disadvantages

Contribution limit of $2,000 per child per year.
The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
- After 30, the funds inside the account become fully taxable and you’re penalized 10%.
Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
Qualified expenses include…
- Tuition
- Books
- Supplies
- Equipment
- Tutoring
- Special needs services
And can also include…
- Room and board
- Uniforms
- Supplementary and transportation services
With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What Is A 529 Plan?

May 22, 2019 by Jacob Sensiba

Education, especially secondary education, is getting more and more expensive. The cost of a 4-year public university has gone up 110% from 1994 to 2014 (Source).

Conversely, wages have grown an astounding 8 times slower than that (Source).

What can you do to save for college? How can you help your kids? Are there certain vehicles that work better than others?

We’ll take a look at one of those in the following article.

What is a 529?

A college savings plan that is exempt from federal taxes, if you use the funds to pay for qualified education-related expenses.

Those expenses include tuition, books, room and board, computer equipment, and necessary supplies for students with special needs, as long as the student is attending at least half-time.

Advantages

Funds can be used for K-12, university, graduate school, and trade schools.
Parents can withdraw $10,000 per student per year to pay for tuition ONLY.
Other people, besides the account owner, can contribute to a 529 plan.
If funds are used for the beneficiary you intended, they can be transferred to a family member.
Earnings grow tax-deferred

Disadvantages

Gift tax exclusions – You are exempt from paying gift taxes if you keep it under $15,000 per individual per year, or $75,000 as lump sum every 5 years.
A penalty of 10% will be assessed for funds used on non-qualified expenses.
Limited investment options – most plans offer mutual funds as investments
- Risk-based – Aggressive, moderate, conservative, etc.
- Age-based – You can select an age-based fund from the get-go, and the fund company will reallocate into new funds as your child gets older.
- Self-selected

Miscellaneous

All plans come with federal tax advantages, but some states offer tax deductions and credits as well!
Every dollar in a 529 plan will deduct 5.6% from your family’s need-based financial aid
- One way around that is to have a family member act as the custodian for the account, so it isn’t in your name
- However, once the child begins withdrawing the funds and is still attending school, they could have 50% of their financial aid withheld because those withdrawals are considered income
You can open one using other state’s plans, besides your own state

Other types of accounts

Coverdell ESA – Similar to the 529 in that you use the funds to pay for education-related expenses, However, there is an annual contribution limit of $2,000 per beneficiary, and there’s also an income restriction (once you make above a certain amount, you can no longer contribute to a Coverdell ESA).
UTMA/UGMA – Stands for Uniform Transfer to Minors Act/Uniform Gift to Minors Act. I’ve written about this in the past, so if you’d like to learn more, check out the article here.
IRA – You can use a Traditional IRA or a Roth IRA to pay for education expenses. Similar to the 529 and the Coverdell ESA, the expenses must be qualified and the student must go to a qualified institution, as indicated by the Department of Education. The most beneficial way to use an IRA is to withdraw the funds from a Roth IRA, but only withdraw what you contributed.

Conclusion

Secondary education is expensive! If you start saving for your kids’ college right away, the compounding returns could really help you save a decent amount.

It’s important to use the right vehicle, and, in my opinion, there’s no better option than the 529.

If you’d like to learn more about paying for college, read this article here. Or if you’re a future or current student that need some finance tips, read this one here.

Be advised: Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal, or financial advisor for more information prior to investing.

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How does Investment Strategy Change with Age?

July 4, 2018 by Jacob Sensiba Leave a Comment

As we all know, as we age and our lives change. Our financial responsibilities and investment strategies change along with it.

In most cases, there are two truths to abide by. You have saved as much as you can and invest according to your risk tolerance, time horizon, and goals.

But what else is there? How do my financial life and my investment strategy change with time?

Starting career

Either you are just out of school or have been in the workforce for a few years. Regardless of which path you came from, there are two things on your list. Get rid of debt, or at least get it under control, and save for retirement.

There are several ways to plan for debt repayment.

Debt Snowball
Debt Avalanche
Balance transfers (credit cards)
Personal Loan (loan consolidation)
Refinance (student loans)

Check out this post on paying off your debt, here.

Step two is saving for retirement. If the company you work for offers a retirement plan, sign up for it. Max out your contributions if you can, but at the very least, contribute enough to get the employer match (if it’s offered).

Also, open a Roth IRA. If you have a little extra, contribute some to a Roth IRA in addition to your workplace plan.

Your investments. Time is your best friend at this point. Most of your investment allocation should be focused towards growth. Don’t put all of your eggs in one basket, diversify among stocks and bonds.

Again, the majority (at least 70%) of your portfolio should be in stocks, in some form or another.

Starting family

If you’re like the average American, your family starts to form around your 30th birthday. Hopefully, you’ve got a good head start on paying down your debt and saving for your retirement. Continue on that path.

With a family, comes saving for your kid’s college education, as well as other expenses (house, car, etc.). Contribute a little every month to a 529 College Savings Plan. The funds within this account can be invested aggressively, similar to your allocation in your twenties.

Your retirement savings is still in a good spot. Similar to your twenties, regarding the stock and bond allocation.

One last thing, get some disability and life insurance. If you have people that count on you, you need to protect them.

High earning years

More than likely, this will be your forties and fifties. At this point in your life, the average American is in their peak earning years, so take advantage of that and increase your retirement savings.

This will also be the time that your kids either go off to college or enter the workforce. Congratulations (kind of) you are empty nesters. You no longer have a college education to save for. More can go towards your retirement.

More than likely, though, you will have miscellaneous expenses from your kids that you will continue to pay for.

Your investment strategy will change slightly. You are getting closer to retirement so it’s time to start protecting what you’ve saved. A little less in stocks and a little more in bonds. Think 60/40 or 50/50.

Near retirement

You are in the home stretch! At this point, your debts (including your house, hopefully) should be paid off. All assets and your retirement savings should be looking healthy.

Your investment allocation will be similar to the last section. Definitely 50/50 if not 40/60, stocks to bonds.

Retirement

Congratulations, you’ve made it to your retirement. This can be liberating for some, but for others, this is an emotional challenge.

You’ve spent the last 40 or so years saving for retirement and now you are expected to start spending it. This is very tough for a lot of people.

From my experience and in my opinion, you should retain some sort of activity. Something that gets you out of the house, something that forces you to socialize, and something that makes you use your brain.

Staying social and sharp mentally could add some extra time to your life.

Your investments should be conservative. At least 40/60, but the more conservative the better. And it’s usually not a bad idea to keep some of your savings in cash, for emergencies such as health expenses (which will certainly go up at this point).

You don’t have many or any, more chances to earn more money, so it’s very important that you protect what you’ve saved.

Conclusion

The above information can be very useful to the average person. Paying off your debt and making your retirement savings a priority is very important.

Unfortunately, there is a retirement savings crisis in America. People aren’t saving nearly enough for retirement. They are counting on other sources, like Social Security or pensions to fund their retirement.

This isn’t enough. You won’t receive enough from Social Security to support yourself and pensions are few and far between, nowadays. We all need to do a better job of saving.

This article was created for informational purposes only. The above items are not to be taken for personal financial advice. Please consult with a professional about your personal situation.

To learn more about retirement savings and investing, and for our disclosures, visit our website: www.crgfinancialservices.com.

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

What my $25,000/year College Tuition Didn’t Teach Me

April 24, 2015 by Kathleen Celmins 1 Comment

It’s been about eight years since I graduated college. I was 22 at the time and excited to start my career. I started off working as a mortgage banker at a local Chicago bank getting paid a small monthly draw and commission.

I know what most of you are thinking. Why would you go straight for commission based job right out of college? The short answer is that real estate has always been my passion. Luckily in college, I was able to save up a little money doing affiliate marketing with online gaming sites. I had very little debt and was living comfortably.

It was about a year down the road after I graduated that I things started to spiral out of control, and before I knew it, I saw my finances spiraling a bit out of control. How did this happen? I knew everything about net present value, gross domestic product, and calculating an internal rate of return. However, one thing I had no clue about was personal finance.

Building and Establishing Credit

Colleges simply don’t put enough emphasis on how important your credit score is. It’s a three digit number that determines how much credit you’re given and will have a huge impact on your future finances. Most students typically have what’s called a “thin file” report. A thin file report means that there aren’t enough trade lines on to provide a FICO score.

The underlying problem with this is that it’s hard to establish a credit score when you can’t obtain it. I established credit by becoming an authorized user on a family member’s account. After a short while, I was able to get a small $500 limit account. I slowly began to build my credit score and my creditors increased my limit over time.

I never knew how important credit was when I was 22 years. It wasn’t until I got into the mortgage industry where I saw the enormous difference in a homeowner’s mortgage rate that a few points could make.

Using Credit Responsibly

We’re all guilty of this. We overextend our credit, and we dig ourselves a hole too deep to climb out of. Having a large credit limit almost gives you a sense of “free money” to use. Your monthly payments are small enough to the point where you think you can afford to keep a large balance. In 2007, credit card companies didn’t need to require the fine prints of “By only paying the minimum payment, it will take you 27 years to pay off your debt.” It wasn’t in those exact words, but you get my drift.

The Credit Card Act of 2009 now requires creditors to show on the statement how long it would take to pay off a balance if the customer only makes the minimum payment, as well as the total interest cost to pay off the entire balance in 36 months. Unfortunately, that wasn’t the case in 2007.

And Then it Went Downhill

A few years later after I got my first credit card, my credit limit went from $500 to $20,000. I had credit card offers coming in my mail every single day. They clearly wanted my business and were offering a nice incentive to sign up (usually a ton of airline miles).

It wasn’t long before I overextended my credit. I found it more difficult to payday my debts and was never able to see real progress.

What exactly do you do in this situation? I couldn’t recall any classroom lectures on how to convince credit card companies to lower your interest rate. It was up to me to do my research and figure it out myself. At the end of the day, I was able to set up a payment arrangement plan with my creditors (similar to that of what credit counseling companies provide).

Personal finance is something that needs to be mandated in schools. No matter how book smart you are, your lack of knowledge in personal finance can make or break your future.

This is a guest post from Kevin Yu, a Senior Associate at Avant and managing editor at ReadyForZero. He also blogs for the Huffington Post and is part of the start-up incubator, Y-Combinator.

Teaching Your College-Aged Child About Money – 2 Guys and Your Money 45

September 12, 2013 by Average Joe Leave a Comment

Subscribe to the podcast through iTunes and new episodes will show up every week!
Never subscribed to a podcast before? Here’s Apple’s fantastic tutorial.
Would you rather listen on your smartphone? Try Stitcher or the iPhone podcast app. We’re available on both platforms.

In the episode, OG & I discuss how we were both horrible with money while in college. We learned many lessons, but today’s college-aged child needs to know about topics many parents didn’t confront. We describe the college landscape and how to help your child cope with financial complexity while in college.

Show Notes

<> Open

<> Hotels.com – Score up to 50% off the published rate on a hotel stay AND help out your favorite podcast all at the same time.

<> From Broke College Kid To Financial Whiz

4 Tips to Pay Down Student Loan Debt

August 21, 2013 by TheOtherGuy 1 Comment

I can’t think of a better way to start of one’s adult life than to do so with over $35,000 worth of debt, can you? Doesn’t the idea of starting your career already knee-deep in the hole sound wonderful? In the words of Lloyd Christmas from Dumb and Dumber, “mmm..that sounds good. I’ll have that.”

Or I won’t.

The average college graduate now leaves college with over $35,000 worth of student loan debt — many have said that the student loan bubble, which now tops $1 trillion (yes, that is trillion with a “T”) is the next major “crisis” in America. I submit that it’s not the next major crisis. It’s already here. In June, Congress couldn’t figure out what to do about student loans, so in their infinite collective wisdom, they decided to let interest rates double from 3.4% to 6.8%. Thanks. We all appreciate that.

If you’re one of the umpteen thousands of people paying off oodles of student loan debt – how do you take care of it?

OG’s Student Loan Debt Tips

Step 1:

Be realistic with how much you owe. Get an accurate count of a) who you owe; b) how much and c) the interest rates. Many people have government and private loans spread hither and yon. Before you create a repayment plan, you have to be honest about how much you have.

Step 2:

Build your personal financial plan. This includes student loans, but also should include building a cash reserve, family planning, retirement planning, and other financial goals. Having a singular mindset of “I’m paying off my student loans before I do anything else… could lead to burn out and could impact how fast you reach your true goals. Plus, depending on your career choice, you may be eligible for deferment or outright forgiveness.

Step 3:

Create a debt payment plan. You have two options when it comes to paying off student loan debt: pay based on your income, or pay based on your indebtedness. Visit www.studentloans.gov and compare payments to determine what’s best for you and your personal financial situation.

Step 4:

Work your plan and throw off discouragement. Follow through with your well thought out plan. You did steps 1 through 3, now just execute. It will become tiresome and you will feel at times like you’ll never get it done – but you will. Track your progress monthly and watch the balances fall.

Student loan debt can seem insurmountable, but with the right well-thought out plan based on your personal financial goals, you can pay those off quickly and efficiently and move on to your other financial goals!

College Planning Strategy: A Creative (and Effective) Option

January 22, 2013 by Average Joe 33 Comments

Here’s a cool way one couple–we’ll call them Tim and Shelly–helped teach their children about responsibility AND made sure that none of their children were (in Tim’s words) the partier pumping the keg, hollering, “This one’s on my dad!”

First, some background:

Although Tim was an architect, you can imagine that the budget was stretched thin in a family of seven and saving for college was a difficult task. Somehow they managed. They actually put away enough for college for all five of their children on a $110,000 salary. They also owned fine retirement funds and had a nice house. Debt? No. Surprisingly, not even a mortgage.

I was honored they were my clients.

Tim and Shelly worried aloud about their responsibility to their children. They wanted all of them to attend college, but couldn’t afford any of the lifetime college student stories you hear about (think Van Wilder). So, together, we hatched a plan. They decided to help their child find scholarships and jobs to pay for the first year of college. When each child entered their legal working years (well before college), they helped each one find jobs and save nearly every penny for school.

How did they get a 15 year old to work hard toward college?

From the beginning, Tim and Shelly were clear: “You will pay for the first year of college yourself and we’ll reimburse the cost each year, based on some conditions.”

What Were the Conditions?

In an effort to discourage screwing around in college and have their children graduate in a reasonable timeframe, they decided to reimburse each A or B with the inflated sum needed the next semester, including that percentage of the cost of room and board.

If college was $7,000 the first semester, junior had to pay that bill. If they received all A’s and B’s, Tim and Shelly reimbursed them 100% of the full cost that they could use the next semester to pay the bill.

While I’m not sure this method works for all children, Tim and Shelly found a way to help their children learn about the working world and responsibility while also paying for college.

When each child applied for college, three of them hadn’t saved enough for the private school they wished to attend. Tim and Shelly filled out the FAFSA form and showed their children how to apply for scholarships. Not one child had to take on student loans. I attribute this to the fact that the rules were clear and Tim and Shelly both helped guide their children.

How did it turn out? All five children graduated with straight A’s and B’s (except one child, who had one C in what Tim described was an incredibly brutal class). When they graduated, Tim and Shelly reimbursed their final semester, which gave each one a nice start for either the working world or for graduate school.

This isn’t the only creative strategy I’ve encountered. With a small amount of money, you could help lower your cost of college by using a quirky real estate-based approach.

The Takeaway

Prepping junior for college isn’t about sticking money into a fund. Sure, that’s important, but this is an easy time to teach your child lessons that she won’t forget. Spend some time deciding how you’ll teach your child the value of school and help them become responsible members of society.

Expected Family Contribution: Digging For (and Finding!) Financial Aid

January 14, 2013 by Average Joe 19 Comments

As you’re waiting for that perfect college to give you the nod, “Expected Family Contribution,” or EFC, is a key term you need to understand BEFORE filling out the FAFSA form (…and you should be filling out the FAFSA form NOW).

Expected Family Contribution is the amount you’ll be expected to pay out of pocket toward your education. Here’s the simple formula:

Cost of college – your need = Expected Family Contribution

Sometimes it’s easier to understand what’s being asked by seeing the equation drawn out. Not to be completely obvious, but that equation makes three points clear:

– You can lower your bill by attending a less expensive institution
– You could attend a more expensive school and not pay a dime more if your need covers the difference between the cheaper school and more expensive school.
– You can lower your Expected Family Contribution by attending a less expensive school, increasing your need, or a combination of both.

Like I said, pretty obvious, huh?

If it was SO obvious, though, why do so many people overpay for college? Not my readers, though, right? We’re so lucky we hang out together!

EFC is about Income and Assets:

An overall note about assets: Assets are excluded for most people with adjusted gross income below $50,000.

Child Money – The FAFSA treats dependent student money as MORE IMPORTANT than parent money in the EFC equation.

Rational? While parents may have other priorities, the child has one: graduate.

Therefore: 20% of dependent and independent student assets count against them when calculating EFC. Little Jimmy’s got $10 in his savings? That’s $2 less financial aid school will give him.

The EFC calculation includes an “asset protection allowance” for parents and independent students with children before ANY money counts against their EFC calculation. How much is the allowance? While the amount varies depending on age and marital status, the average family receives a $45,000 allowance. After that, only 12% of assets are used toward the family EFC calculation.

So, to summarize:

– Parents and Independent Students with Children receive an asset protection allowance of around $45,000
– 20% of dependent student assets are used for the EFC calculation
– 12% of parent assets are used
– 7% of independent students with children assets

Got it? Awesome.

What’s the rational for these numbers? Parents and students with children have to make ends meet at home first, and then can focus some of their money on college. Students in college should spend a higher percentage of assets on education.

I hope you’re starting to see that WHERE you save is an important factor when deciding how to save for college. Clearly, keeping money in a parent’s hands vs. saving in junior’s name can be a good idea in many circumstances.

Big Point: It’s illegal for parents (or anyone other than the child) to remove money from junior’s name to avoid horrible EFC consequences (or for another other reason). However, junior can purchase items beyond food, clothing and shelter with his own money. You can also choose to save more money (or an equal amount) into the parent’s name for college.

Also notice – 529 plans….they’re in a parent’s name.

…and that money in life insurance policies? It doesn’t count against you at all. As far as EFC calculations go, it doesn’t exist.

Want more on the best places to save for college? Check out: College Savings Simplified, The Best Places to Save for Education

Income

Forget full time work for dependent students. It weighs heavily against EFC!

Yeah, I know, you want junior to have a job in college. Guess what? Every dollar junior earns (after a small allowance) counts more severely against his need than income a parent earns. Once again, there’s good rationale for this: junior should be focused on graduating, so if he works, then he should pay every dollar he makes toward school.

As with assets, there is an income protection formula:

– Dependent students receive an income protection amount of $6,000. After that, between 22 and 47% of the amount junior earns is used for EFC calculations. (It’s a sliding scale with percentages rising as the income level rises.
– Independent students with children and parents receive a much more generous allowance. For parents, the number ranges from $16,000 to $55,000 depending on the number of dependents in school and overall family size.

As you can see, parent income counts against need, but once again, parents only have a smaller percentage of their income that counts against EFC.

Rationale? Parents have many priorities besides a dependent student’s education, while dependent students need to save. The EFC allows for a small part time job to learn skills, but punishes students who work full time. Work on graduation!

Good news for me: during the EFC calculation, because I’ll have two in college at the same time, my total parent contribution is divided by two.

Retirement

How do retirement accounts factor into EFC? Money saved into retirement accounts DOES COUNT against EFC. Rationale? You should expect to sacrifice for a short time to help junior through college. If you’re the one headed to school, graduation quickly is your number one priority.

Strategies

If you’re reading this with young children (or just a glimmer in your eye), realize these calculations can change. However, I’ve been teaching clients about EFC since my children were born, and things are roughly the same as they were then. So:

– Save money into the parent name instead of a child’s name.
– Save aggressively into 401k plans BEFORE college years start because you may have to lower your contributions during college years.
– If you’re fairly certain you’ll be a financial aid candidate, cash value life insurance may be an option (although I generally shy away from these products)
– Forget about junior working full time during college. You’ll just elongate the process for him and you.
– Use Junior’s money to buy assets he’ll use during college and for expenses that don’t include food, clothing and shelter. If you’d like, use the money YOU save by NOT covering these non-essentials into a plan in the parent’s name.

Fun, huh? Financial aid programs actually make a ton of sense to me AND it becomes much clearer HOW to save when you know the keys to the FAFSA and EFC.

What parts of financial aid are most confusing to you? Leave them in the comment section and we’ll try and tackle those next.

This is only one piece of an overall college financial plan. Check out: 5 Steps to a Successful College Financial Plan.

Photos: College student w laptop: Ed Yourdon;