By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
Personal Financial Management (PFM) program staff often counsel military families about college planning.
After a house and purchasing several cars, college is one of the largest expenses that many families face. For several decades, tuition and fees have been increasing faster than the rate of inflation. In 2017-18, the average cost of tuition and fees was $9,970 for public colleges (for state residents) and $34,740 for private colleges.
Despite the high cost, an investment in a college education is generally worth it. People who learn more usually earn more. According to a study by Georgetown University, the difference between the lifetime earnings of college and high school graduates is $1 million and the difference between the highest- and lowest-paying college majors is $3.4 million.
Below are eight college planning tips to share with service members:
- Learn About the GI Bill– Take maximum advantage of GI bill educational assistance for service members, veterans, and their dependents. The Post-9/11 GI bill provides up to 36 months of education benefits for approved programs. For service members released from active duty before 1/1/13, there is a 15-year time limitation to use this benefit. For those released after this date, the time limitation was removed.
- Set Aside Savings– Consider these three frequently used accounts for college funding: state 529 college savings plans, Coverdell Education Savings Accounts (ESAs), and custodial accounts managed by a parent for the benefit of a minor child. Each type of account has advantages and drawbacks. Shop carefully for 529 plans. Each plan has its own maximum contribution limit and “menu” of investment choices. Two helpful Web sites for 529 plan investors are savingforcollege.com and www.collegesavings.org.
- Prioritize Retirement Over College– Save for retirement first. When parents have limited income and assets and it’s an “either/or” choice between college and retirement savings, financial experts generally suggest funding retirement accounts. Selfish as it may sound, the rationale is that there are funding sources for college, such as student loans and scholarships, but limited options at retirement.
- Do the Math- Estimate the cost of a college education with an online college savings calculator. Select a few “representative” types of schools such as a community college, state university, and private college and investigate their current expenses. Key factors for calculations are inflation rates and investment earnings.
- Match College Savings Time Horizon and Investments- Consider stock mutual funds for college savings for children in elementary school and younger. Once a child enters middle school, gradually shift into fixed-income (e.g., short- and intermediate-term bond funds) and cash (e.g., money market fund) assets. By the time a child is a college freshman, most, if not all, of the money saved for college should be reallocated.
- Take Advantage of Available Tax Breaks- Bone up on the nuances of student tax breaks including the student loan interest deduction, the American Opportunity Credit, and the Lifetime Learning Credit. Each one has very specific rules concerning how it can be used in combination with other tax breaks and how much can be claimed if two spouses are both attending school.
- Maximize Chances for Financial Aid– Don’t assume that a child won’t qualify for financial aid because you “make too much money” or have saved for college. Consider placing more money in retirement savings plans (e.g., TSP and IRAs) because it does not have to be reported on financial aid application forms.
- Start at a Community College- Transfer later to a public or private four-year institution. Students have the dual advantages of eventually receiving a bachelor’s degree from a four-year college and saving thousands of dollars of savings on tuition, fees, and room and board expenses. Check with both schools in advance about guaranteed admission agreements, course prerequisites, and requirements to transfer credits.
Join us Tuesday, September 25 at 11 a.m. ET for Paying for College: The Forever GI Bill and Repayment Plans. Free. CEUs available. RSVP here.