While parents make several mistakes planning to pay for college, I featured six of the most common mistakes I see:
1. Not creating competition among colleges: If your child identifies a school, you should have your child apply to two or three similar schools. For example, if your child applies to a small, liberal arts private school, you should apply to similar schools. Often children apply based on geographic considerations, rather than similar schools, even if they aren’t close geographically. By applying to similar schools, the student has a chance to create competition. If your child’s first choice comes back with a lower amount of aid than a similar school, you can appeal the decision by your child’s first choice.
2. Assuming you can’t afford private college: It is common knowledge that private school is more expensive than state schools. So many parents completely write off private school. Often, private school may not cost more than a state university. Aid is based on the Expected Family Contribution (EFC), and a family may qualify for more aid at a private school, especially if the family has more than one child in college.
3. Ignoring community colleges: It’s natural for parents to want to provide everything for their child, but community colleges are a solid way to save money. If the child finishes at a four year school, the degree reads the name of the four year school with no reference of attending a community college. Community colleges are excellent institutions and offer students a chance to get the pre-requisites out of the way at a much lower cost.
4. Worrying too much about the FAFSA: Parents often make drastic maneuvers to qualify for more aid. The primary way of doing this is by re-positioning assets. There are lots of insurance and annuity salesmen who prey on parents promising higher college grants by selling products to improve their FAFSA outcome. While it is true life insurance and annuities are exempt from the FAFSA calculations, most people don’t end up with more aid due to these maneuvers. Once a family make more than $50,000, the grants are harder to receive. Additionally, moving assets into these vehicles has a material impact on retirement and taxes.
5. Not Thinking Strategically about the tax return: Some parents make unnecessary moves to get more aid, but the opposite is true as well. If a parent doesn’t think about the tax ramifications for each taxable event, they can jeopardize potential aid. One time events usually lead to lower aid. The Expected Family Contribution is based primarily on the tax return. Some examples of common one time events are:
- Taking capital gains in a year by selling a stock
- Getting a one time bonus
- Selling a rental property for a gain or even selling a business
- Taking an IRA distribution, especially one to pay for college.
6. Sacrificing retirement savings for college: As mentioned previously, parents want to do everything they can for their children including paying for college. However, many parents are behind on retirement savings. Your child can get loans for school. Parents can’t get loans for retirement. If the choice is saving for retirement or paying for college, then retirement rules the decision. Even worse, some parents actually remove money from retirement vehicles to pay for college. This has big tax ramifications and can materially affect the financial aid the student is eligible to receive.
Kirk Kinder, CFP® is the Founder of Picket Fence Financial, a fee-only financial planning and investment management company dedicated to saving folks from Wall Street. Picket Fence Financial does this through a few different ways. One, our fee-only approach ensures our advice is tailored to our clients needs and not driven by commissions. Two, we minimize costs for clients by utilizing low cost Exchange Traded Funds (ETF) and aligning our internal operations to keep our company costs down (and passing this along to our clients). Third, we offer a la carte planning, which means our clients decide how they want to work with us. Rather than forcing clients into our model of planning, we offer hourly, retainer, or asset management options (or a combination thereof).
All information on this site are the opinions of Kirk Kinder, CFP® and should not be construed as investment, tax, estate or insurance advice. Please consult your own specialist for personal assistance.
