Date: March 2, 2011
You are running behind. Sorry, but most likely you are behind in saving for a college education. You should have started before now. But if you haven't, all is not lost and, for what it's worth, you're not alone. (Visit Carolina Parent's annual College Guide for more resources.)
Many people considering college for their children wait too long to figure out where the money to pay for it will come from. As with most things, sooner is better: The sooner you start to answer the money question, the better.
In the end, your child's college education will most likely be financed through a combination of savings, scholarships or grants, and out-of-pocket money, which may come from you, other family members or your child. The first move is to start on the savings as soon as you can.
The Magic Number: 529
For most families, the way to start is with a "529 plan," a tax-free investment program specifically designed to pay for college. The program is named for the section of the federal tax code that made it law in 1996.
"The best thing I think a person can do for a college education is a 529 fund," said Thom Daniels, a financial planner with Ameriprise. "You can build it in small increments and it has a large cap that most people won't meet. And if you use it in your state for qualified college expenses (tuition, fees, room, board, books, and supplies and equipment required for enrollment), the growth is tax free."
A 529 plan also offers flexibility. Anyone can contribute to the fund, making it a great gift option for grandparents and others, and its proceeds can be used in other states (though that may affect state taxes) and by more than one person, such as a second child or the account owner.
Each state administers its own 529 program and, in North Carolina, not only are the earnings exempt from state taxes, but state taxpayers who contribute to an NC 529 account may be eligible for deductions of up to $2,500 for an individual or $5,000 for a married couple filing jointly, according to the College Foundation of North Carolina, which administers the stateís program.
For 2010, the NC 529 required minimum contributions of $25 and had a cap of $382,032 per beneficiary.
The NC 529 program also offers many investment options, including a conservative fund that has a guaranteed return, said Ben Kittner, the CFNCís manager of marketing research and public relations.
The CFNCís website, cfnc.org, provides all the tools necessary to enroll in and administer 529 accounts. The foundation also has counselors available at a toll-free number to walk you through it.
In addition to having set up a 529 plan a long time ago, Kittner said that, as early as the student's elementary and middle school years, students and parents should start to consider the child's career interests and the kind of education, thus money, they'll need to work toward.
The FAFSA and Beyond
Once a high school student has chosen a college and been accepted, parents need to fill out the FAFSA "Free Application for Federal Student Aid" form, which determines the federal money for which they are eligible, either as needs-based grants or loans. This is usually done in January, mainly because it requires two years of tax forms and other basic financial information. The FAFSA, online at www.fafsa.ed.gov, has gained a reputation as a bruiser of a form to complete, but Kittner said it's less rigorous than it was. "They keep making it easier, and now, this past year, they've even made it shorter. People just looked at it, especially when it was on paper, and I think they were just freaked out by the length."
Once you get your FAFSA report, you'll know what kind of federal money you'll have to draw on, and should then contact your school to get its financial aid office working for you. Schools are on your side. They want to make sure money isn't an obstacle for a student they've decided would be a good addition to their institution. Private schools, in particular, have foundation money available for students. Many schools also have work-study programs, part-time jobs specifically for students, to help defray expenses.
There are also many, many scholarships of varying amounts offered by public, private and civic organizations that go unclaimed. The CFNC site has a search tool for finding many based in North Carolina, and Fastweb is a popular national scholarship search site. Scholarships often have specific eligibility parameters and require essays, interviews or other work to win them, but there's money out there. "It's almost just a matter of how much time youíre willing to invest in the research," Kittner said.
Once you add up savings, grants and scholarships, you'll probably find that you need a loan to cover the shortfall. Apply for federal loans first, Kittner said, because they'll have better interest rates, and then consider private loans. The federal Pell Grants, which are available to low-income undergraduates and some grad students, and Stafford loans, which are fixed-rate loans available to nearly any student, are the two most popular federal programs.
Privately, "there are a ton of things you can do," Daniels said, mentioning home equity loans and life insurance policies as sources of ready money. He said he's seen parents refinance their home so there's no home equity asset in their financial statements, and put the money in a cash-value life insurance policy to be cashed out and put toward the mortgage once Junior graduates.
One mistake parents make is starting a college fund for a teenager. By the time a student is 12 or 13, Daniels said, there's too little time before college to save enough to make a dent in expenses, and the money set aside only reduces the family's eligibility for financial aid. It's even worse if the account is in the student's name, because eligibility is based on 100 percent of the student's available funds, but only 35 percent of parents' assets.
Another bad move is to cash in a 401(k) or other retirement fund for a child's education. "There are loans and grants, and part-time jobs for kids in school, but you don't get any grants for retirement," Daniels said.
And, indeed, those loans, grants and jobs are there, even though times are tight you may think you'll never make the numbers add up. "There are a lot of people who are going to try to help you pull it through," Kittner said. "And there are people who know about programs that you may not know about. So the message is don't give up, because getting a college education is worth it."
The Money Map
Follow these links to resources to help finance your college education
College Foundation of North Carolina - www.cfnc.org
The CFNC is a free service provided by the State of North Carolina that provides a wealth of information and assistance to students and parents as they plan, apply and pay for college.
NC 529 Plan - www.cfnc.org/save/save.jsp
The federal 529 tax-free savings program is the pre-eminent route to college savings, and North Carolina's plan is considered one of the nation's best. The CFNC can help you set up a fund, offer investment options, and help you administer the fund as your savings or needs change.
Free Application for Federal Aid - www.fafsa.ed.gov
The FAFSA determines not only how much money the federal government will give or loan a college student, it's also used by most schools and states to gauge what money they'll provide. The form and help for completing and filing it are all online these days, making it an easier task than in years past. The filing deadline is typically June 30 each year; for example, for the 2010-2011 school year (July 1, 2010 - June 30, 2011) FAFSA on the Web applications must be submitted by midnight Central Daylight time (1 a.m. EDT), June 30, 2011.
Federal Student Aid - http://studentaid.ed.gov
Federal Student Aid, an office of the U.S. Department of Education, is the informational gateway to grants, loans and work-study programs offered through the federal government for education beyond high school. It provides a variety of tools and resources to help you apply for federal money.
CFNC Scholarship Search - www.cfnc.org/paying/schol/aid_search.jsp
DO NOT pay for scholarship research. Fastweb and Finaid are two of several free scholarship search sites on the Web. And once again, the CFNC is working for you, with a search tool specifically for scholarships set aside for North Carolina residents.
Many private financial planning firms and banks administer savings plans and loan money that can be used toward college payments. Your school's financial aid office is also there to help you find money to ensure that you can attend college.