It’s that time of year – when graduates and their families get ready to say goodbye and start the next chapter of their lives. For many the associated costs can be daunting, with parents wanting to help by paying for as much as possible. Very noble and a wonderful sentiment – but not necessarily the wisest course of action; unless they have secured their own retirement first.
The first thing parents should be doing, whether they’ve been saving for college or not, is encouraging their child(ren) to apply for FAFSA. This opens the door for a variety of funding sources, not just federal aid – scholarships, grants, etc… Also, don’t assume college is the only way to go; after all, not everyone knows what they want to do or even have a desire to attend. Other options include: military service; working; Profoundly Disconnected (Mike Rowe’s trade scholarships); and apprenticing with a trade.
For those with younger children, or if you want to start saving for your grandchildren, a 529 Plan may be the right tool for you. It could provide you with a state income tax deduction (talk to your accountant) and, if the money is used for education related expenses, is tax-free. However, there is a 10% penalty if it’s not used for educational expenses.
Another option is to pay the tuition directly. To maximize the benefit do NOT give the money to anybody but the school, otherwise it could be considered a gift and depending upon the amount you may need to file a gift tax return. Again talk to your tax professional and/or advisor for more details.
Finally, be realistic about what the student wants to achieve. Community colleges are much less expensive than universities, and offer much of the same lower level course work. Explore the opportunities within a chosen major before enrolling, it doesn’t make sense to rack up thousands of dollars of student loan debt if there’s little to no possibility of making enough to pay it back as soon as possible.