FAP797: Financial Aid For Parents of Young Children

Listen now:

Disclosure: I am not a certified financial planner or a CPA. Please consult a qualified professional before making any major financial changes.

The single most important thing you can do is to start saving sooner rather than later. A qualified CPA or CFA will be able to advise you better (read: they have certifications, I don’t) about the specific balance of retirement and saving for your child, but commit to saving first and foremost. Every dollar you can save is a dollar neither you nor your child will have to borrow.

What savings vehicle should you choose? Most financial planners agree that in terms of least tax liability and least impact on financial aid eligibility, a 529 savings plan is a great idea. Here’s where things can get tricky. There are two kinds of 529 plans.

Type 1 is called a prepaid tuition plan. Pay tuition now to the state of your choice, and as long as your child goes to a school in that state, you’re paying tuition at today’s rates for tomorrow’s education.

Type 2 is called a savings plan, but really, it’s an investment plan, similar to how mutual funds and retirement plans like 401ks work. For this show, we’re going to focus on this second type of plan. You invest money into these plans, where it sits and earns interest for however long, before you withdraw the money. What makes a 529 savings plan different than, say, a regular mutual fund, is that you are not taxed on interest at any time as long as you use the money solely for qualified educational expenses - meaning tuition.

If for some reason your child chooses not to go to college, you can withdraw the money with a 10% penalty on interest earned, which is not a bad deal, all things considered. Where this can really shine is if you have more than one child - you can designate the other child as a beneficiary and have no penalties.

When’s the best time to start saving? Right now. Today. Saving for college is all about leveraging the time value of money - the longer you can save, the more interest you’ll earn. That said, even saving a year before college in a 529 isn’t a bad idea, because again, every dollar you save is a dollar that you and your child doesn’t need to borrow. Here’s an idea of how the savings can rack up. If you start to save $10 a week when a child is born, after 18 years at 8%, you’ll have close to $21,000. If your child is 8 years old and you can put aside $25 a week, you’ll have saved nearly $20,000 in just 10 years. If you’ve only got 5 years until school, if you can squeeze $50 a week out of your budget, you’ll still have nearly $16,000 saved.

How do you choose a plan? Shop around. Each state has 529 investment plans, and you don’t have to be a resident of that state to enroll in that state’s plans. Make sure you take a look at your state’s plan first, though - 33 states offer state tax benefits for investing in state plans.

Here’s a key phrase for you to remember: no load. There are a number of brokerages and advising firms that charge what’s called a front end load - and that can shave 5% or more off your investment as a commission to the brokerage for effectively no work, since 529 plans are managed by the states that administer them. It’s about as close to a scam as you can get without actually legally being a scam. Another version of no-load is direct-sold.

Here’s a second secret: be very careful about fees. Look for plans that have fees under 1% - there are a lot of them out there, whereas other plans can have fees as high as 2.5% annually, which again is close to being a scam.

Another important point: 529 plans are, for the most part, not insured in any way by the FDIC or NCUA, which means that theoretically, if the market were to crash hard, you could lose it all. This is true of all investments except savings accounts up to $100,000 per account and US Treasury bonds. It’s worth thinking about. Statistically, things tend to grow over time, but that’s no guarantee that your plan won’t lose money at some point.

As with all forms of investing, diversification might not be a bad idea. Take a look at various savings and investment opportunities. Putting some money aside in FDIC insured CDs or US treasury bonds, as well as investing in non-529 investment options, may make sense. You’ll definitely want to consult an independent financial advisor for more information - and be sure the advisor does NOT earn any fees or money from recommending any financial services products. A good advisor will disclose any conflicts of interest, or better yet, will be paid entirely for services rendered by you.

Finally, there’s always the issue of having money of any kind to put into a plan in the first place, whether it’s for college, retirement, or other financial needs. Take a sharp look at entrepreneurial opportunities like affiliate programs online, such as Commission Junction and other programs. If you can create a small, home-based side business that can bring in $50 a month or $100 a month extra, you can devote that to savings exclusively and do pretty well.

Even better, start the search for scholarships for your child as early as possible. Encourage them to pursue activities, hobbies, sports, and other things they genuinely enjoy, and look for scholarships and contests relating to those activities early on. We’ve profiled a number of scholarships on the podcast with a minimum entry age of 13, and scholarships earned can be deposited into 529 plans to earn additional interest on top of the savings you put aside.

Check out our free scholarship search eBook!

If all of this sounds confusing, don’t worry too much about it - remember that many community banks and credit unions offer no-fee, no-load financial planners that can help you more accurately plan your finances and save for the future. The fundamental lesson I want you to take away from this episode is:

Every dollar you can save is a dollar neither you nor your child will have to borrow.

Did you enjoy today’s show? If so, please consider subscribing for free to get it delivered to you. Subscribing for free means you don’t have to remember to download it every day.
+
+
+

Direct MP3 file download: Click here to download the MP3

Reminders
+
+ Financial Aid Podcast Show Notes at FinancialAidPodcast.com.
+ Free scholarship search secrets eBook at StudentScholarshipSearch.com/ebook
+ Open an FDIC-insured savings account today!
+ Private student loans available at any time - visit AlternativeStudentLoan.com
+ Student credit card information at StudentPlatinum.com
+ FAFSA form tutorials and free help at FAFSAonline.com
+ College Search
+ Grad student? Get graduate financial aid information at the GradLoans.com blog!
+ Stafford federal student loans at StaffordLoan.com
+ The Financial Aid Podcast is a publication of the Student Loan Network.

I want to hear from you! Email me at financialaidpodcast {at} gmail {dot} com, visit http://www.FinancialAidPodcast.com, or call 206-350-1208.

Technorati Tags: financial aid financialaidpodcast