I was
recently featured on WBAL Channel 11 discussing mistakes parents with college planning:
Top 6 college tuition mistakes parents make | Maryland News – WBAL Home
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.
