Short-Term Planning for Financial Aid Needs
Benjamin Franklin once said, "Waste neither time nor money, but make the best use of both." This is great advice for those involved in financial planning for college, especially as college grows near. When time is short, parents anticipating a significant need for financial aid should schedule their investment-plan withdrawals carefully.
The Saving for College Timetable
Early in your savings timeline, when college is still a far-off proposition, a reasonably aggressive investment strategy makes sense—and may in fact be necessary to keep pace with rapidly rising education costs, which are increasing at about twice the rate of inflation. In the early years, your focus should be on growth. About six years before your child applies to colleges, check with a financial planning professional to assess the best investment vehicles for your college savings.
On the other hand, lots of parents invest too conservatively just before their child enters college. Try to set your goals according to a realistic performance and timeline. Around two years before your child applies to colleges, seek advice from a financial-planning expert on how to position your assets for scrutiny by college-aid programs.
As college admission approaches, plan on gradually converting your investments to cash, timing withdrawals to meet expenses. Try not to incur capital gains in the tax year before aid is needed, since these count both as income and as an asset. If possible, realize any capital gains in the year before the year upon which financial aid will be based.
Clock Ticking? Aim Low
Another key strategy when time is of the essence is to minimize your income growth, since income is a heavily weighted factor in needs assessment. Up to 47 percent of parental income is considered eligible to pay for school costs (as opposed to just 5.65 percent of parental assets).
Whatever tactic you use, keep a safe distance from your retirement fund. Saving for college shouldn't threaten your retirement plan. Your child can draw on plenty of resources to pay for school, but when it comes to retirement, you're on your own. And even a large nest egg won't affect your child's aid eligibility since financial aid formulas don't take your 401(k) and IRA savings into account.
Consider All the Options
Even if your income is higher than average, don't write off financial aid; you may still qualify for some form of assistance. In addition to loans, which make up the bulk of available financial aid, there are many grants, scholarships, and work-study programs available.
Consider all the angles when undertaking any college savings strategy. Your choice from among investment options and accounts, gifting to children, and tuition repayment could drastically affect your financial circumstances. Before taking any major financial action, it's always wise to seek professional advice.
Most importantly, do not delay planning for college expenses. Every Wall Street guru knows that the benefits of time and compounding far outweigh the luck of market timing.
