When it comes to saving for college, it’s never too soon to begin putting money away.
“College is a big ticket item,” said Tony Luckhardt, financial planner at Foster & Motley in Cincinnati. “It gets more expensive.”
In addition to being able to contribute to a college savings account for a longer period, starting early enables families to take advantage of compounding investment income. At an 8 percent annual return, for example, a college nest egg would double every nine years.
State-run 529 plans are popular college savings vehicles. The investment growth is tax-free as long as the funds are used for college expenses. In addition, some plans offer tax advantages, such as a deduction on state income tax. Most states have a 529 plan and investors may utilize any plan regardless of the state in which they live.
In evaluating plans, advisers say to consider the investment options and expenses. Many plans allow for self-investing and can automatically adjust to more conservative investments as a child nears college age.
“I think if I were a consumer, I would stick with direct plans or those that don’t involve a financial adviser,” said Casey Boland, a wealth adviser with Cincinnati-based Hengehold Capital Management. “Look at other states if your state’s plan isn’t competitive.”
For investors seeking socially responsible companies that conform to Catholic social teaching, options include Ave Maria Mutual Funds, based in Plymouth, Michigan.
“We do steer clear of companies that conflict with Catholic beliefs,” said Mike Richter, Ave Maria’s director of marketing. “We have a Catholic advisory board on which we have Catholics who advise on issues and then employ the services of [a] screening organization to evaluate companies.”
Despite saving, many students need to seek out scholarships, grants, and loans to cover their higher education expenses.
The first step, experts say, is filling out the Free Application for Federal Student Aid (FAFSA). This information is used to determine a student’s eligibility for financial aid.
“Always fill out the FAFSA application, even if a family feels their income or wealth is too high,” Boland said. “If you’ve not filled out the FAFSA form, the college won’t help you from the loan perspective.”
In addition, students should look for scholarships and need-based grants from local organizations. High school counselors and university financial aid offices can help students identify those sources. Some companies, including fast food restaurants, offer their employees tuition assistance.
When borrowing, experts say, seek out federal student loans because they often have more flexible terms and latitude in repayment options. As for the amount of total student loan debt, don’t borrow more than half of what the student expects to earn in the first two years out of college.“You want to think about the payment you’ll be paying because you don’t want it to be overwhelming,” said Chris Hennekes, a financial planner at Truepoint Wealth Counsel in Blue Ash, Ohio. “You have to be very logical about it.”
New to college finance? Click here for a list of key college terms.