If you are the parent of a teenager who will soon be entering college, you have many reasons to be proud. Your child’s high school achievements and ability to navigate the college application process have put them in position to further their education and prepare for what will hopefully be a rewarding career.
Before you get too excited about the future, however, you may want to step back and revisit how your family plans to pay those impending college bills. Fine-tuning your strategy for drawing down savings and applying for financial aid can help ensure you understand how much debt you or your child may incur by the time graduation time rolls around.
Below are several factors to consider before your child heads off for his or her freshman year:
Dial down the potential risk in your college savings accounts
If you have been socking away money in a dedicated college savings account, you are no doubt counting on that money being there when it’s time to pay for your child’s college tuition bills. The last thing you want is to have a sudden stock market swoon take a chunk out of your savings. To reduce the likelihood of this happening to you, be sure to take a close look at where your college savings are currently invested.
If you are invested in an age-based 529 college savings plan that is aligned with your child’s high school graduation year, you can take some comfort in knowing that the fund’s portfolio manager has been gradually reducing the fund’s exposure to stocks. For example, in January 2015, the asset allocation of the age-based investment portfolios in Fidelity-managed 529 plans that target a 2015 graduation date had about 20% of assets in equities, about 40% in short-term investments, and about 40% in bonds.
If you’re managing your college savings accounts on your own, take a close look at where your dollars are allocated and consider reducing your exposure to stocks and other volatile investments. If you want to be even more conservative, you could move your savings into money market funds or other short-term funds.
Fine tune your plans to pay for college
By this time, you should have a plan in place for paying tuition bills and other related college expenses. Assuming your child's first day of college is less than a year away, now is the time to develop a more detailed strategy that takes your child from freshman year through his or her senior year.
To get started, sit down with your child and lay all your cards on the table. Compare your savings and anticipated financial aid against your projected costs over the course of your child’s college years. This may range from a two-year community college to four years or more.
If your analysis indicates a potential shortfall, discuss your family’s options. Possible solutions include relying on income your child earns from summer jobs and other employment, making an extra effort to win scholarships or grants, additional student loans, or taking out a home equity line of credit on your home, among others.
If you’re taking out student or parental loans, be sure you and your child understand the terms fully. Be clear on who is responsible for paying off the loan and when your first payments will be due. Some loans don’t require repayment until after graduation, while others will require repayment while your child is still in college.
Get your timing right
Families who have set aside money in a 529 college saving plan will need to consider the timing of distributions they intend to take to pay college expenses. In order to qualify for tax-free withdrawals for higher education expenses, your distributions must be taken during the same calendar year in which you incur these costs.
To avoid potential problems, add reminders to your calendar and make sure you leave your 529 plan administrator enough time to process your distribution requests in a timely manner. Instructing your plan administrator to send payments directly to your child’s college can also help speed up the process.
It’s also wise to review the order in which you plan to draw down any other college savings accounts. For example, if your child has money in a custodial account, such as Uniform Gift to Minor Account (UGMA) or Uniform Transfer to Minor Account (UTMA), consider tapping those savings first. These assets are considered property of your child and as such, they weigh more heavily in financial aid calculations. Ideally, you should consider tapping these savings before applying for aid, assuming it makes sense given your broader plan. However, if you still have money in a custodial account and you plan to apply for financial aid in the future, consider using these funds to pay for the early years of college.
Finally, remember to factor inflation into your plans. From 2004-05 to 2014-15, the average published cost for tuition, fees, room and board at private nonprofit four-year colleges rose by an average of 2.1% per year, over and above increases in the Consumer Price Index1. At public four-year colleges, the inflation rate exceeded CPI by 2.8% over the same period.
Be prepared for last-minute expenses
As you prepare for freshman year, you will also need to shell out additional money for items such as dormitory room bedding and supplies. If your child does not already have his or her own computer, that’s another expense you need to factor in. Depending on the location of your child’s college, you may also incur significant travel expenses.
The fact that your child will incur additional expenses for books should come as no surprise. However, you may be shocked to learn just how high these costs may be. According to the College Board, the annual cost of yearly books-and-supplies for the average student at a four-year public college is about $1,200. According to a recent study by the Government Accountability Office, the price of college textbooks rose 82 percent between 2002 and 2013, nearly three times the general rate of inflation. To potentially save money, consider buying used books online or renting books.
To help maximize your financial resources and minimize student loan debt, keep the lines of communication open throughout your child’s college career—not just before freshman year. Revisit your financial calculations and assumptions along the way and make sure all parties involved understand their roles.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan are offered by the state of New Hampshire, MEFA, the state of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments.
The UNIQUE College Investing Plan is offered by the state of New Hampshire and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire resident, you may want to consider, before investing, whether your state or the beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.
Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.
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