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Sep 1, 2014

College Is Coming!

Sponsored Content provided by Jason Wheeler - CEO, Pathfinder Wealth Consulting

Ready or not, the summer is over! Around this time each year, children are buying backpacks, folders and notebooks, and high school juniors and seniors are beginning their college search and application process. While the students are excited about life after high school, we parents have something else looming in the back of our minds – figuring out how to pay for the already exorbitant and rapidly rising costs of college that are coming up in just a few short years. 

For some, there is that fleeting hope that with a lot of hard work and a little luck their child can lessen the burden by receiving a scholarship. Others with lower incomes may find some relief by qualifying for financial aid. Of course, those who have been willing and able to regularly fund a 529 college savings plan are in a position to cut a check, 100 percent tax-free, to cover college expenses. But most will worry regardless, and rightfully so. 

With the average national tuition inflating at around 6 percent to 7 percent per year (8 percent per year in North Carolina*), paying for college is a concerning topic, not only for parents with teenage or college-age children, but for all parents who want to provide their kids with the opportunity to go to college – even brand new parents. Almost every one of my clients with young children expresses concern about the cost of college and their ability to afford a college education by the time their kids graduate from high school. I realize that college isn’t for everyone, but statistics show that having a college degree increases your ability to find employment and your income earning potential over time. 

Fortunately, there are some tools that can help parents plan and prepare to provide their children with a higher education. For example, earlier this month, our financial planning program released an impressive update to our college savings calculator to plan for future college costs with enhanced accuracy. This flexible analytical tool allows us to include a host of variables and generate an estimate of future college costs for each one of our client’s children. We can enter assumptions, such as scholarships, existing funds, loans and annual inflation rates, and make calculations based on the adjusted future tuition costs of a specific school, or a program average for a general type of school. 

There are lots of ways to save and pay for college. Education savings options include 529 Plans, prepaid college tuition programs, Coverdell Education Savings Accounts, UTMAs, and 2503(c) Minor’s Trusts. You, your student or both of you can borrow money. In addition to loans, there may be grants or scholarships available. 

Inside the planning system, we can link various savings vehicles to our clients’ financial plans, and depending on contribution projections over time, we can estimate what the accumulated amount of their savings will be over time. Once we calculate the estimated savings, we can anticipate whether additional funds, either out-of pocket, or through a loan, will be required, and how much. 

Here’s a quick example: I am a proud Seahawk, and my wife Ashley and I are excited that our daughter, Merritt (who is 18 months old), has already decided to follow Daddy’s footsteps and attend UNCW (with no coercion on my part). According to the tool, the annual cost of an undergraduate education through UNCW (this includes tuition and fees, room and board, books and supplies, as well as any additional costs we wish to add) is estimated to cost $15,997 per year, in today’s dollars. Further, let’s assume that 20 percent of college costs will be paid by scholarships. Assuming an annual rate of return of 7 percent and annual inflation of 6 percent, to make up the difference in college expenses we would need to put away roughly $3,100 per year (or $258 per month) in a 529 savings plan. If we chose not to use a 529 plan and use a taxable savings account instead, we’ll need to boost those savings to $3,600 per year ($300 per month). By the way, that’s also assuming that we’re increasing our contributions annually by 3 percent. To put it into perspective, this is a cumulative savings (in today’s dollars) of $138,791. 

As you can see, that’s quite a large sum to save for college expenses, and that is why saving for college is becoming such a growing concern for new and existing parents. But wait, before you start directing all of your extra income towards savings for college, there is one important thing to consider. You (or your children) always have the ability to borrow for college; however, you cannot borrow for retirement. Be careful that you don’t jeopardize your retirement savings to make college savings contributions. Your retirement savings should always come first, and believe me, your children will be thankful that you took the time to save for yourself first. There is a great piece we just added to the Fact versus Fiction section of our website that explains this very risk.

As always, if you’re interested in learning how college savings will impact your path to financial independence, feel free to give me a call or shoot me an email. 

*Taken from the College Board’s Trends in College Pricing 2013 

Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit Jason can be reached at [email protected], 4018 Oleander Dr. Ste. 2 Wilmington, NC 28403, or 910-793-0616.

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