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In the realm of personal finance, few topics generate as much concern and as many sleepless nights as the cost of sending kids to college. For single parents, this concern can be particularly daunting, especially considering the potential decline in income that often follows the loss of a spouse. In this article, we’ll explore key insights from my podcast episode featuring Robert Farrington, founder of The College Investor, who is a student loan and financial aid expert.
This topic is especially timely as 800,000+ students have completed first-year college applications for the 2024-2025 school year, according to Common App Research Brief. My son is one of those many students who are waiting on pins and needles to find out if they got into their school of choice.
Start with Yourself: The YES Framework
Farrington first introduces a straightforward framework called YES, emphasizing the importance of prioritizing one’s financial well-being before delving into college savings. The framework stands for You, Educational Savings Accounts (ESAs), and Savings.
YOU: Taking care of yourself financially draws a parallel to the airline safety advice of putting on your oxygen mask before assisting others. Before focusing on saving for your child’s education, ensure your own financial stability with an emergency fund, retirement plans, and a solid foundation to manage life’s challenges.
ESAs: Explore education savings accounts! Farrington recommends starting with ESAs, particularly the 529 plan, which offers tax advantages. These accounts allow tax-free growth and withdrawals for qualified education expenses. Contributions can be made by various family members, fostering a collaborative approach to saving for education.
SAVINGS: In addition to ESAs, having a general savings account is crucial. Not every expense your child encounters will be strictly educational. A general savings fund provides flexibility for other needs, such as travel, medical treatments or extracurricular activities.
Navigating the 529 Plan Maze
It’s important to point out that each state has its own 529 plan, making choosing the right plan somewhat complex. However, college savers usually benefit most from their own state’s plan, as they often offer tax deductions or credits for state residents.
Importantly, Farrington dispels the myth that your child must attend college in the state where the 529 plan is established. Even many colleges abroad accept 529 plan funds, expanding the options for international education.
Making Informed College Decisions
Take a realistic approach to college decisions and be sure to emphasize the financial aspect. Farrington encourages families to rethink the value of certain prestigious institutions and consider alternative paths, including attending community colleges and transferring after the initial years.
A key rule of thumb is not to borrow more for college than you expect to earn in the first year after graduation. This pragmatic approach aligns financial investment with potential future earnings, steering students away from excessive debt.
Federal vs. Private Loans
Navigating student loans requires understanding the differences between federal and private options. Federal loans offer benefits like income-driven repayment plans and forgiveness options, which private loans lack. However, we caution against Parent PLUS Loans, a type of federal loan for parents of undergraduate students. While intended to support children’s education, these loans can burden families financially, with generally higher interest rates than private student loans, it can affect parents’ retirement and financial stability in the long run.
Embracing Financial Creativity
My conversation with Farrington underscores the importance of creativity in navigating the financial challenges of sending a child to college. He suggests starting conversations early with children about the family’s financial situation, setting expectations, and encouraging proactive approaches like applying for scholarships and grants.
In the landscape of college costs, financial planning becomes an indispensable tool for parents. By adopting a pragmatic and collaborative approach, leveraging education savings accounts, and making informed decisions, families can navigate the complexities of funding higher education. Ultimately, embracing financial planning and early communication can empower both parents and children to make sound choices and build a secure financial foundation for the future.