The decision to save for your Massachusetts’ kid’s college education seems like a no-brainer. Considering how expensive tuition is these days (the average cost for a degree at a four-year private college is $138,960, according to the College Board), parents capable of doing so want to put money aside to secure their child’s academic and eventually professional future and to help their kids avoid student loan debt.
But the question of whether to save for college isn’t as cut and dry as many think. A lot of financial experts say that while saving for college is important, it should almost always take a backseat to retirement savings; the logic being that banks will happily loan students money for education, but they won’t loan senior citizens cash to play shuffleboard. And, yes, this is a genuine concern.
The more speculative anti-saving argument goes like this: Saving for college, parents actually hurts children’s chances to qualify for financial aid, thus making it harder to afford a degree in the long run. By saving, parents are volunteering to hand a college cash that it might otherwise have offset with a grant or scholarship. And the math isn’t always great. Dollars accrued in a 529 college savings plan make a difference, but $25,000 isn’t going to pay a $200,000 bill.
When it comes down to it, though, if there’s any chance that you’ll eventually help your child pay for college, then you should start saving now, says advocates for 529 college savings plans. Every dollar you save is a dollar less you’re going to have to borrow in the future. Assuming you’re not making a conscious parenting decision to let your child work their way through school, or you simply don’t have the funds to save, it doesn’t make sense not to put money away.
Most students will not be able to pay for college without some parental help. The federal government considers parents to be the primary source of money for a student. The primary responsibility for paying for college lies with the family and the government only steps in when the family is unable to pay.
While there’s a “kernel of truth” to the idea that parent savings penalize a child’s aid eligibility, it’s a small penalty and one not worth avoiding. In fact, just the opposite. On the FAFSA, the Free Application for Federal Student Aid, there are student assets and there are parent assets.
If you save money in a custodial banker brokerage account in your child’s name, not in a 529 account, 20 percent of the value of the assets reduces aid eligibility. If you saved in the parent’s name, it’s a bracketed system with a top bracket of 5.64 percent. Which means if you have $10,000 in a bank account in the student’s name, it’s going to reduce aid by $2,000. If the same $10,000 is in a parent-owned account or a 529 college savings account owned by the student or the parent it reduces aid by $564.
People worry too much that if they save money they won’t get any financial aid, particularly with a 529 or savings account that is owned by the parents. Only about 5 percent of the money parents save is even counted in the FAFSA, so you could have $100k saved in a 529 account and the financial-aid formula only looks at around $5,000 of it. If you have the money, it’s better to save than to not save.
That doesn’t necessarily mean, however, that college savings should be your top financial priority. Just that it makes more sense to save than not to save. If you have limited money though, as most people do, make it a lower priority; stressing the importance of paying off debt, saving for retirement, and building an emergency savings fund.
There are certain things that you should always do before saving for college. If your employer matches contributions to your retirement plan, you should always maximize the match because that’s free money. Parents shouldn’t prioritize retirement over college savings but rather build both in unison. Parents who save for both retirement at college can still come out on top for both, and won’t suffer in their golden years.
One of the most overlooked provisions in a divorce separation agreement is college expenses. With college costs on the rise, this issue should be discussed and memorialized in writing to avoid future conflict regarding issues such as decision-making as to choice of college.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation.