College Planning – Start Young!

Certainly, as readers of this article about college planning, you are parents involved in your children’s lives and you want only the best for them. Parents want their children to be at least as successful you have been in life. This does not just mean monetary success. We all want happy and healthy kids. Monetary success is also very important in the world today. The best way for children to achieve success in life, monetarily and otherwise, is to enter and graduate from a respectable college or university.

Studies show that young adults who attend college have better critical thinking skills, are healthier, smoke far less and are more physically active than those who do not attend college.

Other studies show that over a college graduate’s lifetime, they will earn over one million dollars more than someone with just a high school education. Investment in a college education is the best investment you as concerned parents can make in your children’s future. It’s just that simple.

Since 1984, tuition for colleges in America has increased an average of 8% per year. So, about every 9-10 years, college tuition doubles – and there reason to believe this will be slowing down anytime soon. With tuition alone (and these numbers are in today’s dollars, not when your kids will be attending in 5, 10 or 15 years down the road) you’re talking about a staggering amount of money. Add things like living expenses, travel, books and fees, it goes from staggering to outright mind-boggling!

Colleges are in a race to attract the best, the brightest, the most promising students graduating high schools today. Some of the reasons for these increases are the competitiveness among universities to attract these students and to be tops among the various organizations that rank colleges and universities. So facilities have to be upgraded and promoted to attract top students.

Professor’s salaries, tenured and otherwise, are another reason why college is so expensive. In order to attract top professors, a premium is paid and tenure is offered. Attracting the best professors is expensive.

Looking at the University of Texas at Austin, the ‘cost of attendance’ (COA) right now, in 2011 dollars, is about 23,000 dollars per year. The COA is the sum total of expenses for young person to attend a college of university. Most private universities are twice the current UT COA – or more.

This is just for undergraduate programs. What if you children are heading to graduate school? MBA? MFA? Law school? Medical school?

You get the picture.

What can families do to meet these expenses and make the investment that will empower their children to earn that extra million dollars over their lifetime?

In response to the crisis in college tuition, in 1996 the government created something called the 529 college savings plan. These plans are state-run and all states have at least one and many states have several 529 plans. Since there is really no standard plan, having multiple choices from each state makes choosing the most appropriate one a very difficult and confusing proposition.

The plans vary widely in fees, performance and management, which only adds to the complexity. Virtually all of them have been hit hard in this bear market posting down year after down year.

In addition to the market risk built-in to 529 plans; they carry legislative risk. This means that if the state decides to modify the plan in some way, you have no say in this. This has been happening in state after state where what parents bought became something else they didn’t want or expect, such as losing certain tax advantages.

In 2006, the rules were changed dramatically in that money in 529 plans WILL count against the family in the financial aid calculation. This is NOT what parents originally signed up for. There is no contractual arrangement between the accountholder of a 529 plan and the plan managers or for that matter, the state government that sponsors the plans.

How is your 401(k) or your market-based retirement plan doing? If you are like most parents, probably not something you want to talk about! Many of those plans have taken significant losses, sometimes more than 70% because they are 100% in the market.

In this scenario, what you buy today will likely be different, and different in important ways, tomorrow. State governments are able to change these plans without a referendum – this can put 529 plan owners in a place they may not want to be, yet have no real way to prevent such changes.

Experts across the board are indicating that it will take many years for the fundamentals to stabilize and for the markets to have a meaningful recovery.

This is a huge problem especially when you factor in that many of these families are faced with their children going to college in only a few years. Now all of a sudden the mechanism families were planning on using to pay for college has left them high and dry. What on earth can they do? They are truly in a very difficult spot with few options.

We generally ride out the ups and downs in the market with a long-term perspective because the time horizon for retirement is quite a bit longer than when your children start their freshman year. We do not always have the luxury of time for funding college. It is right around the corner and coming faster than you think.

So, what options are there?

If you do not bring money to the table, your children will not get into college. That is just a hard cold fact. Amounts of student loans have been limited by the federal government and have very stringent qualifications. It is easy for a family’s income to be too great and not qualify.

Many parents assume that student loans are how college is paid for these days. That can be partly true, but recent legislation has limited the amount of student loan debt with which students are allowed to graduate. It varies depending on circumstances; generally it is 5,500 to 7,500 dollars for each undergraduate year. Consider UT Austin, that barely covers the tuition for ONE semester and this assumes that you meet the strict qualifications for the loans in the first place.

Do not forget that tuition has increased an average 8% a year since 1984. Since then, college costs have easily tripled – or more.

Loans are the most expensive way possible to pay for college. Using loans is 2-5 times more expensive than using savings. Did you realize that waiting 5 years to start your children’s college savings plan will cost you at least twice as much as starting today?

Saving in the right way and in the right places will give your children the best shot at getting into the college of their dreams.

The bottom line is that the field of college planning/funding is a complicated one and just like people have accountants, financial advisors and insurance brokers, families, more than ever, need to have access to a person that specializes purely in the complex field of college planning. With so many legislative changes coming fast and furiously, it’s hard to keep up. You need guidance from a professional who specializes in college planning/funding, pure and simple.

About The Author

Greg Stevens, a College Planning Specialist, is the owner of The College Planning Specialists of Entre Nous Financial. Based in Austin, TX, he serves clients all over Texas and his agency has College Planning Specialists helping families across the country.

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