The Free Financial Advisor

You are here: Home / Archives for College Planning

10 Financial Moves That Break FAFSA Eligibility

by Leave a Comment

college
Image source: pexels.com

Filling out the Free Application for Federal Student Aid (FAFSA) is a key step for families hoping to lower the cost of college. But not everyone knows that certain financial decisions can hurt your chances of getting aid. Some moves might seem smart at first, but they can raise your Expected Family Contribution (EFC) and reduce or eliminate your eligibility for need-based aid. If you’re planning for college costs, understanding what breaks FAFSA eligibility is crucial. Here are ten common financial mistakes that can impact your FAFSA eligibility, so you can avoid them and maximize your financial aid.

1. Transferring Assets to a Student’s Name

Putting assets in your student’s name might sound like a way to help them feel responsible, but it can backfire. The FAFSA formula counts student assets much more heavily than parent assets. While parent assets are assessed at a maximum of 5.64%, student assets are assessed at 20%. That means moving savings or investments into your child’s name can sharply reduce your FAFSA eligibility by increasing your EFC.

2. Cashing Out Retirement Accounts

Retirement accounts like 401(k)s and IRAs are not counted as assets on the FAFSA. However, if you cash them out to pay for college, the withdrawal counts as income on the FAFSA for that year. This can significantly increase your reported income, causing a big drop in FAFSA eligibility and reducing your need-based financial aid for at least one year.

3. Large Gifts or Inheritances

Receiving a large monetary gift or inheritance before or during college might feel like a blessing, but it can hurt your financial aid eligibility. The FAFSA considers untaxed income, including gifts and inheritances, as part of your financial picture. If you receive a significant sum, it could raise your EFC and break FAFSA eligibility for that year.

4. Selling Investments Right Before Filing

If you sell stocks, bonds, or other investments just before completing the FAFSA, you could be increasing your income for the year. The FAFSA uses your tax return to calculate aid, so capital gains from investments count as income. This move can make your financial picture look stronger than it is, which can cut your FAFSA eligibility and reduce aid.

5. Paying Off Debt with Savings

It might seem logical to use your savings to pay down debts like credit cards or car loans before applying for aid. However, the FAFSA doesn’t count consumer debt against your assets. If you deplete your savings to pay off debt, you’ll have less cash on hand, but your FAFSA eligibility won’t improve. In fact, you could end up with less flexibility and no impact on your aid package.

6. Failing to Report Required Untaxed Income

Some families think skipping certain types of income on the FAFSA will help, but this is risky. Untaxed income, like child support or contributions to tax-deferred retirement plans, must be reported. Omitting these can result in corrections later, which may break FAFSA eligibility or even trigger a loss of aid if the mistake is caught.

7. Overfunding 529 Plans in the Student’s Name

529 college savings plans are a smart way to save, but whose name the account is in matters. If the student or a non-parent relative owns a 529 plan, distributions may be counted as the student’s untaxed income on the next year’s FAFSA. This can sharply reduce FAFSA eligibility, as student income is heavily weighted in the aid formula.

8. Ignoring the FAFSA Deadline

Missing the FAFSA deadline is a straightforward way to break FAFSA eligibility. Federal, state, and college deadlines can vary, and many forms of aid are first-come, first-served. Failing to file on time may mean you miss out on grants, scholarships, or work-study opportunities that could have made college more affordable.

9. Reporting Home Equity Incorrectly

For most families, the value of your primary home is not counted on the FAFSA. However, if you mistakenly include home equity as an asset, you could artificially inflate your resources and reduce your FAFSA eligibility. Always check the FAFSA instructions or consult a financial aid expert to make sure you’re reporting assets accurately.

10. Taking Out Parent PLUS Loans Before Filing

Parent PLUS loans are federal loans parents can use to help pay for their child’s education. But if you take out a PLUS loan before filing the FAFSA, the loan amount counts as an asset until it’s spent. This can increase your EFC and lower your FAFSA eligibility. Wait until after you’ve filed the FAFSA to consider these loans if possible.

Smart Planning for Maximum FAFSA Eligibility

Understanding what breaks FAFSA eligibility can help you avoid costly mistakes. The FAFSA formula isn’t always intuitive, and some moves that look financially savvy can actually hurt your chances for aid. Before making big financial decisions in the years leading up to college, consider how those choices will show up on the FAFSA.

Have you run into any FAFSA eligibility surprises? Share your experiences and questions below—we’d love to hear from you!

Read More

6 Retirement Plans That Kick You Off Federal Aid Without Notice

7 Financial Steps That Can Disqualify You From Medicaid

7 Investment Accounts That Could Disqualify You From Financial Aid for Your Kids

by Leave a Comment

7 Investment Accounts That Could Disqualify You From Financial Aid for Your Kids
Image source: 123rf.com

Parents often work hard to save for their children’s future, but some savings strategies can unintentionally reduce the chances of qualifying for financial aid. The type of account you choose can directly impact the amount of need-based aid your child receives. Certain assets are factored more heavily into financial aid formulas, making it important to understand where your money is stored. By knowing which accounts to be cautious with, you can avoid surprises when tuition bills arrive. Here are seven common investment accounts that could disqualify you from financial aid for your kids — and what to consider instead.

1. Custodial Accounts (UGMA/UTMA)

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are considered the child’s assets for financial aid purposes. This means they are assessed at a much higher rate than parental assets in the aid calculation. Even a modest balance can significantly reduce need-based assistance. While these accounts offer flexibility and tax benefits, they’re one of the investment accounts that could disqualify you from financial aid for your kids if the funds are substantial. Before funding them heavily, weigh the potential impact on future college costs.

2. Standard Brokerage Accounts in the Parents’ Name

Although assets in a parent’s name are generally assessed at a lower percentage than the child’s, large balances in a taxable brokerage account can still affect aid eligibility. These accounts include stocks, bonds, mutual funds, and ETFs held outside of retirement plans. Because they are readily accessible, they count more heavily in financial aid formulas than certain protected accounts. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if the balances are high. Consider using tax-advantaged college savings plans as an alternative.

3. 529 College Savings Plans Owned by the Student

529 plans are excellent tools for college savings, but ownership matters. If the account is in the student’s name, it’s treated as the student’s asset and assessed at a higher rate. This can make a noticeable difference in the expected family contribution. While 529 accounts are generally favorable in aid formulas when owned by a parent, student-owned plans can still be one of the investment accounts that could disqualify you from financial aid for your kids. To maximize aid potential, it’s often better for parents or grandparents to own the plan.

4. Coverdell Education Savings Accounts

Coverdell accounts allow for tax-free withdrawals for education expenses, but like student-owned 529 plans, ownership impacts financial aid eligibility. If the student is the account owner, the funds are considered their asset. Even when owned by a parent, the balances can still reduce aid eligibility more than some other savings vehicles. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if they are heavily funded. Weigh the benefits of tax-free growth against potential reductions in need-based aid.

5. Trust Funds for the Student’s Benefit

Trust funds, depending on how they are structured, can be counted as either a student or parental asset. In many cases, the value of the trust is factored into the aid formula even if the student cannot access it until a later date. If the trust is irrevocable, it still may impact eligibility depending on the terms. Because of this, trust funds are one of the investment accounts that could disqualify you from financial aid for your kids without careful planning. A financial planner experienced in college funding can help structure trusts more strategically.

6. Savings Bonds in the Student’s Name

Savings bonds, such as Series EE or I Bonds, are considered student assets when owned by the child. Even though they can be used for education and may offer tax advantages, their ownership can hurt financial aid eligibility. The value of the bonds will be included in the formula, potentially reducing the amount of aid awarded. This makes them another example of investment accounts that could disqualify you from financial aid for your kids if the holdings are significant. Transferring ownership to a parent before filing the FAFSA may be worth considering.

7. Real Estate Investments Outside the Primary Home

While your primary residence is generally excluded from the FAFSA asset calculation, other real estate investments are not. This includes vacation homes, rental properties, and land. The equity in these properties can significantly raise your expected family contribution. Because they are often high-value assets, they’re among the most impactful investment accounts that could disqualify you from financial aid for your kids. If real estate is part of your portfolio, consult with a financial aid advisor to understand its effect before applying.

Balancing Savings and Aid Eligibility

The challenge for parents is finding the right balance between saving for the future and preserving financial aid opportunities. By understanding which investment accounts could disqualify you from financial aid for your kids, you can make more informed decisions about where to place your assets. Sometimes, the best approach is to diversify across protected accounts and more flexible investment vehicles. With early planning and the right strategy, you can support your child’s education without sacrificing valuable aid.

Have you reviewed your savings strategy for its impact on financial aid? Share your experiences and tips in the comments to help other parents plan smarter.

Read More:

Why Do So Many Teenagers Think There Parents Will Take Care of Them After 18

What Financial Planners Know About Divorce That Most Couples Don’t

9 Ways to Ensure You Don’t Overfund Your Kids 529 Plan

by Leave a Comment

college
Image Source: unsplash.com

Saving for your child’s college education is smart, but did you know it’s possible to save too much in a 529 plan? Overfunding a 529 plan can lead to unexpected tax consequences, limited flexibility, and even wasted money if your child doesn’t use all the funds for qualified expenses. With college costs rising and the rules around 529 plans constantly evolving, it’s more important than ever to strike the right balance. Whether you’re just starting to save or already have a healthy nest egg set aside, understanding how to avoid overfunding your kids’ 529 plan can save you headaches down the road. Let’s explore nine practical ways to keep your college savings on track—without going overboard.

1. Understand the Contribution Limits

The first step to avoiding overfunding your kids’ 529 plan is knowing the rules. Each state sets its own maximum aggregate contribution limit, typically ranging from $235,000 to over $500,000 per beneficiary. Once the account reaches this cap, you can’t contribute more. However, you should also know the annual gift tax exclusion of $18,000 per donor per beneficiary in 2024. Understanding these limits helps you plan your contributions wisely and avoid unnecessary tax complications.

2. Estimate Future College Costs Realistically

It’s easy to overestimate how much your child will need for college, especially with all the talk about skyrocketing tuition. Use online calculators to project future costs based on your child’s age, the type of school they might attend, and inflation rates. The College Board’s annual reports are a great resource for up-to-date tuition trends. By basing your savings goal on realistic numbers, you’ll be less likely to overfund your 529 plan.

3. Factor in Scholarships and Financial Aid

Many parents forget to consider the possibility of scholarships, grants, or other financial aid when funding a 529 plan. If your child is likely to receive merit-based or need-based aid, you may not need to save as much as you think. Review your child’s academic and extracurricular strengths, and research the types of aid available at schools they might attend. This can help you adjust your savings target and avoid overfunding.

4. Revisit Your Plan Regularly

Life changes, and so do your child’s educational plans. Maybe they decide to attend a less expensive school, take a gap year, or even skip college altogether. Make it a habit to review your 529 plan at least once a year. Adjust your contributions based on updated college cost estimates, changes in your financial situation, or new information about your child’s goals. Regular check-ins help ensure you’re not putting in more than you’ll actually need.

5. Coordinate with Other Family Members

Grandparents and other relatives often want to help with college savings, but if everyone is contributing to the same 529 plan, it’s easy to lose track and overfund. Communicate openly with family members about your savings goals and the account’s current balance. Consider designating one person to monitor contributions or setting up separate accounts if needed. Coordination is key to avoiding accidental overfunding.

6. Diversify Your Education Savings

A 529 plan is a fantastic tool, but it’s not the only way to save for education. Consider splitting your savings between a 529 plan and other vehicles like a custodial account (UGMA/UTMA) or a Roth IRA. This approach gives you more flexibility if your child doesn’t use all the 529 funds for qualified expenses. Plus, it can help you avoid the tax penalties associated with non-qualified withdrawals from an overfunded 529 plan.

7. Know the Qualified Expenses

Not all education-related costs are covered by 529 plans. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs. However, things like transportation, health insurance, and extracurricular activities usually don’t count. If you overfund your 529 plan and your child doesn’t have enough qualified expenses, you could face taxes and penalties on withdrawals. Familiarize yourself with what counts as a qualified expense to avoid surprises.

8. Plan for Multiple Children

If you have more than one child, you can often change the beneficiary of a 529 plan to another family member. This flexibility can help you avoid overfunding one child’s account while underfunding another’s. If your oldest child doesn’t use all their 529 funds, you can transfer the balance to a sibling, cousin, or even yourself for further education. Planning with all your children in mind helps you make the most of your savings.

9. Consider the New Rollover Rules

Recent changes to 529 plan rules allow you to roll over up to $35,000 from a 529 plan to a Roth IRA for the beneficiary, provided certain conditions are met. This new option, effective in 2024, gives you a way to use leftover funds for your child’s retirement if they don’t need all the money for college. Understanding these new rollover rules can give you peace of mind and reduce the risk of overfunding.

Smart College Savings: Balance Is Everything

Saving for your child’s education is a wonderful gift, but more isn’t always better. By understanding contribution limits, estimating costs realistically, and staying flexible, you can avoid the pitfalls of overfunding your kids’ 529 plan. Remember, the goal is to support your child’s future, without tying up more money than you need to. With a little planning and regular check-ins, you’ll be well on your way to smart, balanced college savings.

How do you approach saving for your child’s education? Share your tips or questions in the comments below!

Read More

Bank of Mom and Dad: How You’re Risking Your Retirement for Your Adult Children

Planning for the Unexpected: Why Newlyweds Should Get Life Insurance

13 Reasons Why Millennials Will Never Be Able To Pay For Their Kids To Go To College

by Leave a Comment

millennials pay for college tuition

The dream of providing a college education for their children is increasingly becoming a distant hope for many millennials. Over the last 40 years, the cost of higher education has increased by more than 153%. Burdened by a combination of economic challenges, rising costs, and stagnant wages, this generation faces a daunting financial reality. Here are thirteen reasons why millennials may never be able to afford to pay for their kid’s college tuition.

1. Mounting Student Debt

student debt

Millennials themselves are still grappling with their student loan burdens. According to the Federal Reserve, the average student loan debt for those aged 25 to 34 is over $33,000. This debt load limits their capacity to save for their children’s education or qualify for other student loans.

2. Stagnant Wages

salary

Despite being one of the most educated generations, millennials have experienced minimal wage growth. Adjusted for inflation, average hourly wages for young college graduates have remained relatively flat since the 1980s, making it challenging to save for future expenses. The average millennial salary is about $47,034, according to the U.S. Census Bureau, and average Millennial household makes $69,000 a year, according to the Pew Research Center. Ultimately, these salaries are not enough to support a family and contribute to savings.

3. High Cost of Living

rising costs

Millennials face exorbitant costs of living, from housing to healthcare. Balancing these expenses alongside saving for their children’s college education becomes increasingly unattainable.

4. Rising Tuition Costs

millennials pay for college tuition

College tuition has skyrocketed over the past few decades, outpacing inflation by a significant margin. According to College Data, the average price of tuition and fees at a private college is $41,540 per year. Even public college tuition for out-of-state students averages $29,150 per year. With the cost of higher education continually rising, millennials find it increasingly difficult to keep up.

5. Decrease in Employer Benefits

employee benefits

Unlike previous generations, millennials often lack robust employer benefits such as pensions and comprehensive healthcare coverage. Without employer-sponsored college savings plans, they bear the full weight of educational expenses.

6. Delayed Financial Milestones

home buying

Millennials are delaying major life milestones such as homeownership and marriage due to financial constraints. This delay further limits their ability to save for their children’s college education.

7.  Financial Priorities

saving for college tuition

With competing financial priorities such as paying off their student loans, saving for retirement, and emergencies, millennials often must prioritize immediate needs over future expenses like their children’s education.

8. Inadequate Savings

inadequate savings

Many millennials have inadequate savings, if any, for their own emergencies, let alone their children’s college education. 58.26% of millennials have less than $10,000 saved. Without a financial safety net, the idea of funding a college education seems like an unattainable luxury.

9. Generational Wealth Disparity

generational wealth gap

Millennials are the first generation in modern history projected to be worse off financially than their parents. The wealth gap between generations makes it increasingly challenging for millennials to provide the same level of financial support for their children’s education.

10. Limited Access to Affordable Higher Education

college application millennials pay for college tuition

Despite the rise of online education and alternative learning options, access to affordable higher education remains limited. As colleges and universities continue to be more selective, this limits student’s access to many programs that may be more affordable. This lack of accessibility further exacerbates the financial strain on millennials.

11. Economic Uncertainty

job instability

Millennials entered the workforce during the Great Recession and are now weathering economic instability caused by factors like the COVID-19 pandemic. Uncertain job markets and economic downturns make long-term financial planning, including saving for college, a daunting task.

12.  Rising Healthcare Costs

rising healthcare costs

Millennials face steep healthcare costs, including insurance premiums, deductibles, and out-of-pocket expenses. A new study found that just over half of Americans who earn under $75,000 annually can cover their deductibles.  These expenses chip away at their disposable income, leaving little room for saving for their children’s education.

13. Intersecting Financial Pressures

financial pressures

Millennials often find themselves sandwiched between financially supporting their aging parents and raising their own children. This intergenerational financial pressure leaves little room for saving for future expenses like college tuition.

Is Saving for Your Kid’s College Tuition Attainable?

millennials pay for college tuition

Millennials face a myriad of economic challenges that make the prospect of saving to pay for their children’s college tuition seem increasingly out of reach. Without systemic changes to address issues such as student debt, stagnant wages, and rising costs of living, this generation may continue to struggle to provide the same opportunities for their children that previous generations enjoyed.

Saving for your child’s college tuition may not be a lost cause, however. Resources like student financial aid, student loans, and scholarships can help pay for tuition. 83.8% of first-year undergraduate students receive financial aid in some form. There may still be hope for millennials aiming to pay for their children’s college tuition.

Read More

12 Crucial Money Lessons Baby Boomers Passed Down to Their Millennial Kids

Top 10 Craziest Splurges Lottery Winners Make

Is A Master’s Degree Worth The Money?

by Leave a Comment

is a master's degree worth the money

It’s no secret that getting an education can come with a massive price tag. However, figuring out whether getting a Master’s degree is a wise investment or a waste of money is often surprisingly tricky. There are multiple factors you’ll need to consider. Otherwise, you may pursue a path that doesn’t lead to the financial boost or lifestyle you’re hoping to snag. If you’re wondering if a Master’s degree is worth the money, here’s what you need to know.

In addition, don’t forget to buy economics essay to be more free and successful while studying.

The Cost of a Master’s Degree

On average, a Master’s degree costs around $66,340. However, what an individual pays can vary dramatically. Some of the lowest cost options may run only $30,000, while the higher end may hit $120,000.

There are several reasons why the price can vary so dramatically. First, every university can set its own rates, so the college you choose plays a role. Generally, private schools cost more than public universities, with average prices sitting at $81,100 and $54,500, respectively. However, some colleges in both groups may break that mold.

Additionally, some majors come with higher price tags. On average, a Master’s in the Arts is more expensive than a Master’s in Science. However, individual majors can have unique price points.

Whether you’re an in-state or out-of-state student leads to cost variances. Typically, in-state students pay less than their out-of-state counterparts, causing the same educational experience to come with two different price tags.

Finally, program lengths differ depending on the course requirements, leading to further potential cost differences. Generally, a 30-credit-hour program costs less than a 60-hour program, mainly because college tuition prices are based on the number of credit hours taken.

Since there’s so much variation in cost, you’ll need to determine how much you’d need to pay for your preferred degree at the college you want to attend. Without that figure, it’s hard to decide on whether getting a Master’s degree is worthwhile in your situation.

Earning Potential Increase

Overall, Master’s degree holders earn approximately 20 percent more than Bachelor’s degree holders on average. That’s a notable jump, giving Master’s degree holders a median income of nearly $78,000 per year.

However, just as prices vary, so does earning potential. Some majors come with a far larger pay differential for those who choose to get an advanced degree.

For example, the differential between a Bachelor’s and Master’s in biology is a startling 86.5 percent. In that case, getting an advanced degree is worthwhile in nearly all cases. For those studying business administration, the Master’s comes with a differential of 51.4 percent, which is incredibly solid. The differential for information technology administration is similar, sitting at 46.9 percent.

But not all Master’s degrees perform as strongly. For instance, the differential between a Bachelor’s and Master’s in finance is just 15 percent. If you major in accounting, the differential is a mere 4 percent.

When determining if a Master’s degree is worth it, it’s wise to explore how much your earning potential increases if you have the extra education. By doing so, you can determine how it influences your long-term earning potential, making it easier to see if the financial value is ultimately there.

Unemployment Rate Differences

If you’re looking for job security above all else and wonder if having a Master’s degree makes a difference, it actually can have an impact.

Overall, the unemployment rate among Master’s degree holders in 2021 – a period where the pandemic was still influencing the market significantly – the unemployment rate was 2.6 percent. For Bachelor’s degree holders during that time, the rate was 3.5 percent. That’s a 0.9 percentage point difference.

Whether that’s enough to sway your decision may depend on your priorities or employment factors in your area. However, it’s worth factoring into the broader equation.

Long-Term Career Outlooks

Another financial factor to consider is the long-term career outlook associated with the roles relating to the Master’s degree. For instance, if a field is growing and there aren’t enough professionals to meet demand, then pay rates are likely to rise since companies are competing for talent. This can make a degree that seems costly today a wise move overall, as the associated earning potential will improve over time.

However, if a job is connected to a position or field in decline, the long-term earning potential may diminish. When the amount of available talent outpaces demand, employers don’t have to compete for strong candidates. As a result, they usually won’t need to increase wages to find a solid new hire. That harms the financial side of the equation from the beginning.

But if wages remain stagnant over the long-term but the availability of candidates remains high, the outlook gets worse. Inflation will ultimately diminish your purchasing power, and the company won’t necessarily have a reason to correct that.

That’s why it’s wise to examine the long-term career outlooks relating to the Master’s degree. That allows you to determine if the extra education may get more or less valuable over time, ensuring you can examine the big picture prior to making a decision.

Degree-Related Job Requirements

Finally, when determining if a Master’s degree is worth it, you need to consider any degree-related job requirements. In some fields or roles, having an advanced degree isn’t a way to stand out; it’s an outright necessity.

For example, you typically can’t get licensed as a mental health counselor or psychologist without a Master’s degree. Upper-level human resources roles may consider an advanced degree a must. The same goes for many healthcare roles. Some areas even require that high school teachers have a Master’s, and nearly all aspiring college professors have to earn an advanced degree to qualify for the job.

If you have your sights set on a specific role and it requires a Master’s degree, then advanced education is essentially your only path toward your dream job. In this case, the satisfaction that comes with working in the field may override many of the financial considerations, making a Master’s degree worth it for intrinsic reasons.

Is a Master’s Degree worth the money to you? Are you a Master’s degree holder that feels it wasn’t worth the time or money? Why do you feel the way you do? Share your thoughts in the comments below.

Read More:

 

 

Cost vs. Value: How to Choose the Right Degree for Your Finances

by Leave a Comment

Paying for college is one of the biggest commitments you can make, but it’s also one of the most essential. Many wonder whether they can even find a job without a degree. While there are still ways to earn a decent living through trade school or freelancing, degrees give you far more than just job opportunities.

A degree prepares you to enter your industry with the knowledge and skills necessary to thrive. You also position yourself as a dedicated, trustworthy professional who is more likely to attract employers or even their own clients. Setting yourself up to increase your net worth over time and for a successful career doesn’t have to cost you six-figures, though. In fact, the flexibility of today’s degrees makes it easier than ever to protect your finances while furthering your education.

What Type of Degree Do I Need?

The level of education you pursue is most largely impacted by your goals. Some jobs have strict educational requirements, like mental health counselors and veterinarians. Other fields are more flexible, and you can enter them with an undergraduate or even an associate’s degree. Before you decide what to study or what type of degree to pursue, think about where you see yourself in five years. Do you have a specific career in mind, or are you more interested in a general field?

Those who have a specific career goal can research job listings to see what employers are actively looking for. Then, you can choose a program that will give you the perfect credentials. On the other hand, you may find that just choosing a major is enough for you to start your studies. You may begin by pursuing an associate’s degree, then move on to a bachelor’s if you want to expand your horizons even further.

Is an Associate’s Degree Worth It?

Because bachelor’s degrees are standard in the modern workforce, those who pursue an associate’s may feel like they’re wasting money on a program. However, most associate’s programs prepare you for a specific job that you can start working immediately after graduation. Unlike a four-year program, an associate’s degree gives you highly specific skills training for careers like a dental hygienist, paralegal or law enforcement officer. The cost of an associate’s can be 50 to 70% cheaper than that of a bachelors. Depending on your school and the program, you may be able to pay as little as $3,000 per year in tuition.

How Much Should I Pay for College?

Every student’s comfort level is different when it comes to debt. Some are willing to go any length to get the degrees they want while others are okay with a trade-off. In general, the average student has roughly $40,000 in student loans by the time they graduate from an undergraduate program. You may be able to offset this by exploring alternatives to federal student loans. Scholarships and need-based grants are free, and private student loans are diverse and flexible. You can borrow student loans from a private lender to fill gaps that aid does not cover, or to get better interest rates.

Choosing the Right School for Your Dreams

No matter what you decide, make sure to take time exploring different schools. While price is important, it’s not the only factor worth considering. You should also consider the faculty, student body, opportunities and career options you’ll have by attending a particular institution. Be sure to reach out to each school’s financial aid office as well. They can help you break down tuition, find better financing options and get the most out of your investment.

A Systematic Approach to Goals

by 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

  1. Large/Lifetime goals – These are things you want to accomplish throughout your life. They can be philanthropic, health, financial, etc. Figure these out first.
  2. 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.
  3. 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. Some may find that magic mushrooms from a magic mushroom dispensary can help them to relax, whilst 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!

Related Reading:

How to Set Long & Short-Term Goals (And Reach Them Too!)

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

by 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?

by

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?

by

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.