Ask parents if a college education is in their kids’ future, and most will say yes. But for many of these parents, this hope for tomorrow is eclipsed by the financial pressures of yesterday and today.
This is certainly the picture that emerges from a September 2014 survey conducted on behalf of CFP Board by ORC International. Of the 1,003 parents surveyed, approximately 46 percent claim they have not started saving or planning to save for their children’s higher education. The primary reasons holding them back are income level, leftover student debt, and day-to-day living expenses. Nearly half of survey parents borrowed for their own college degrees, and 42 percent are still paying off their debt. For 15 percent, the burden is greater than $25,000.
Even for the parents who have managed to save, the amounts set aside for children’s college education are dismally low, compared to the escalating costs of a degree. Fifty-five percent of parents have less than $10,000 set aside for a first child. With each additional child, the savings drop, leaving 25 percent of fourth children with nothing at all put aside for their future.
Clearly, parents are struggling and need financial advice on college planning. What can they do to keep alive the American dream of giving the best start in life to their children?
Get educated about the finances of higher education.
CFP Board’s survey showed that the majority of parents with college-bound children are hoping that their kids’ college can be paid for without loans. However, hope can be a poor substitute for realistic planning. It’s important that parents and their students be thoroughly versed in the different types of student loans and how to access the nearly $150 billion of low-cost federal funds available each year. Recently the Department of Education reported that almost half of graduating high school seniors do not file the FAFSA form (Free Application for Federal Student Aid), believing incorrectly they would not be eligible for a loan, or even an outright grant.
Parents also need to understand that the sticker price of a college degree is usually much higher than its actual cost, once the amount and availability of financial aid is factored in. They will want to compare the “net price” of the colleges being considered to make the most cost-effective choice. An expensive, top flight school may be a better and cheaper choice than a less costly option, once the college’s average financial aid per student is factored in.
To get the financial aid education they will need, parents should visit the Consumer Financial Protection Board website where they will find a newly developed tool for comparing financial aid offers across different colleges.
Save some, but invest more, especially while kids are young.
A surprising finding in CFP Board’s survey is that compared to older parents, younger parents--(ages 18-39) who presumably have younger children--are the most likely to be using cash savings accounts for whatever money they are managing to put aside. These young parents should be doing exactly the opposite, and investing in riskier, higher returning investments rather than playing it safe in savings. Time is in their favor to permit them to take more risk. They should also be availing themselves of the tax advantages and managed equity investments within 529 plans to give their funds an extra boost.
Let creative cost-cutting strategies make up for the lack of funds.
Money may be tight for a lot of parents, but ways to whittle down the costs of a quality college education are plentiful. For example, encouraging bright children to take college credit courses in high school can lop off a semester or two of college expense. Living at home and attending community college for a year before transferring to a state university or private school helps, too. Knowing what tax deductions and credits you may be eligible for, and whether they are best used by the parents or the child, can also create some big savings. For most parents, there’s no “one and done” solution to the college funding problem; rather it may take a patchwork quilt of fixes, adjustments, and strategies to make the college dream affordable.
Talk to a CFP® professional.
Finding the means to send a child to college is a complicated issue that requires a comprehensive solution. Parents need advice in a number of areas: budgeting, tax and investment management, evaluating the costs and benefits of outside sources of funding. The answers for one family may be entirely different than those for another.
CFP® professionals are expressly trained in taking a 360 degree view of their clients’ financial goals. In helping parents to find ways to send their children to college, they will look at the tax, investment, and debt management implications involved, and also consider how college funding may affect the realization of other important goals, such as retirement planning.
Parents, take heart. With good financial planning, it is possible to look up from day-to-day financial concerns and see that bright future awaiting your children.