Tag Archives: college savings

Important College Financial Aid Tips

Posted on February 1, 2013 | Leave a comment

For those of you with college-age kids or kids who will soon be in college, one of the annual rights of passage is the completion of the Federal government’s “FASFA” (Free Application for Federal Student Aid) form. For many, this form should be completed as early in February as possible.

The information on the FASFA is used by college financial aid offices to determine how much the expected contribution towards annual college costs should be from the family (parents and child(ren)) and how much should come in the form of scholarships, grants and loans. This information is presented in snapshot format — it measures all assets and debts as of the date that it is completed.

Even if you don’t expect to qualify for much aid, the FAFSA process is necessary to be eligible for Stafford Loans (for the student) or PLUS loans (for the parents.)

Mark Kantrowitz, the publisher of Fastweb and FinAid, recently made a presentation to financial advisors about some of the techniques that parents could use to lower the “expected family contribution” (EFC) towards college costs from parents. His talk included these strategies:

  • Minimize income. Parents should work to minimize their income during the base year (the year before their oldest child goes to college) and the other years that they have children in college. This can be done by deferring income (perhaps into your employer retirement plan) or avoiding taxable distributions from retirement plan and using capital losses to offset taxable capital gains where possible.
  • Actively reduce reportable assets. The FASFA form looks at the parent’s income, savings, taxable investments, trust assets, 529 or Coverdell Education savings accounts and value of any business holdings. It also asks for the total savings of the student. It does not look at the value of the parent’s home, the assets in retirement accounts or their debt. Because of this, parents who want to minimize their EFC should use assets in savings or other taxable investment accounts to pay down loans, credit card balances or mortgages and lines of credit before completing FASFA.  They should also work to maximize their retirement plan contributions for those years. Finally, it is better to save in the parent’s name and not the name of their child because a much smaller percentage of the parent’s assets are counted towards the EFC than the child’s assets.
  • Spend down assets smartly. Parents should spend down the assets of the child (buy buying computers for college or other supplies for the child) before they file the FASFA. This will lower the expected contribution rate of the child.
  • Maximize student overlap. The EFC for a family is reduced if more than one child is in college. This is the one case where it pays to have triplets.

For more information on FASFA, see the fastweb website at this link: http://www.fastweb.com/content/fafsa

  • How are you saving for college expenses?
  • What has your experience been like dealing with financial aid offices?

~ Allyn Hughes CFP®, ChFC®, CLU® — Brooks, Hughes & Jones – Partners in Wealth Management – Tacoma, WA

www.BHJAdvisors.com

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GET requires understanding premium, investing early

Posted on November 2, 2012 | Leave a comment

The Washington state Guaranteed Education Tuition (GET) program opened its annual enrollment period November 1 with a new per unit price of $172.

We’ve written here, here and here about historical rate increases and the underfunded program but the state continues to assure investors that there is a very low likelihood of the program failing to meet future obligations.

In order to meet guarantees to keep up with tuition increases, the current unit price includes a large premium over the 2012-13 school year payout value of $117.82. This year’s purchase price of $172 means a 46% premium over today’s cost.

“This ‘premium’ over current tuition assures stability for the program,” GET material indicates. “It will take about four or five years to realize a gain on your investment, but GET’s increase in value is steady and guaranteed over the years.”

Because of this premium, in order to get a worthwhile return on participation in the program, it’s beneficial to invest only while future college students are young. The GET program material is even making it more clear that savings after the elementary school years won’t be as valuable as contributions made early in life.

GET material says: “If you begin saving with GET before your kids or grandkids reach middle school (the earlier the better), you will save substantially on future tuition costs and benefit from the security of the guarantee.”

State actuaries estimate that tuition increases at Washington state universities (which the value of GET units are based on – even if the student redeems GET units to fund costs at a private or out-of-state college) are expected to continue 10% annual increases over the next few years.

Annual Washington state colleges tuition increase

Based on tuition and state-mandated fees at the most expensive Washington public university, generally either the University of Washington or Washington State University.

The rapid rise in costs for GET units and the underfunded nature of the program have led to some speculation that a GET version 2.0 may be unveiled. It would have a different pricing structure and could have its coverage reduced.

Do you own GET units?

Do you expect the value of GET units to keep up with their rising costs?

What concerns do you have about funding college costs?

By Gary Brooks, CFP® — Brooks, Hughes & Jones, Partners in Wealth Management – Tacoma, WA

www.BHJadvisors.com

 

 

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GET program sets new unit rate at $172, deals with $527 million shortfall

Posted on July 30, 2012 | Leave a comment

The Washington state Guaranteed Education Tuition (GET) program has set its unit price for 2012-13 at $172. The increase from last year’s $163 unit price is surprisingly low – 5.5%. This comes after a 39.3% increase for 2011-12. Over the first 11 years of the GET program, the unit price climbed from $35 to $76 – a 117% increase (10.65% average annual climb). But since reaching $76 per unit for 2008-09, the unit price has grown 126% in five years (25.2% per year).

 GET is a prepaid tuition program that is guaranteed to keep up with the increase in tuition at Washington state colleges. Since the state legislature allowed colleges freedom in setting their own tuition, the costs have climbed quickly and the GET program has had to adjust its unit price to try to keep up.

“The trend in our state is toward much greater tuition increases than we have seen in the past,” said GET Director Betty Lochner in the press release announcing the 2012-13 unit price. “It’s a top priority to keep GET affordable for families, but it’s also a priority to ensure the long-term stability of the GET program.”

Stability of the program relies more on continual supply of new participants each year than it does on investment gains. As long as more participants open accounts or add to existing accounts, the program expects to cover its future obligations. If participation declines significantly in the future, however, the program could be challenged to meet its obligations based on investment returns alone.

New participants pay a significant premium for their units. While new units in 2012 cost $172, the payout value for participants redeeming units during the 2012-13 school year is $117.82. Therefore, if you buy 100 units (equal to one year of full-time state university tuition), you pay $17,200 for tuition credit that is worth $11,782 today. Because of the large premium over today’s actual cost of tuition, participants should plan to purchase units several years before they are redeemed. Participants who purchased units for young children before the large price increase of the past five years, have received an excellent return on their money.

According to the GET program, more than 25,000 students have used their accounts at colleges in all 50 states and five foreign countries. Since the program began in 1998, Washington families have opened over 144,000 accounts worth $2+ billion.

The rapid rise of tuition costs, combined with difficult investment markets over the past decade, has created challenges for GET to remain solvent. According to this article in the Seattle Times on June 28, 2012, state actuary Troy Dempsey said that about $19 of every GET unit purchased for $163 during the 2011-12 enrollment period was used toward a recovery plan to make the fund solvent.

Dempsey suggested that the likelihood that GET would require a bailout of funds from the state legislature over the next 50 years is just 2.4%. The pool of dollars currently available to be redeemed by GET participants is $2.3 billion. The value of all units sold is $2.8 billion. Theoretically, if everyone cashed in their tuition credits at once, the state would be obligated to make up the shortfall of $527 million, Dempsey said.

While GET participation has generated great tuition inflation protection for those who have been in the program since before 2008, it’s hard to know exactly what to expect for those who have started more recently at much higher cost.

A few things to keep in mind:

  • 100 GET units are equivalent to one year of tuition expenses at the most expensive state school (although they can be used at any accredited institution of higher learning).  Extra school fees for particular majors — a difference that may grow greatly due to new legislation — are not included in this amount.
  • The units are only intended to offset tuition costs, not room-and-board or the full cost of college. You will have to consider other options (savings, loans, grants/scholarships, part-time work) to pay for the rest of your college experience.
  • Buying GET units in lump sums is more cost efficient than buying through a monthly payment plan which levies a 7.5% finance charge or “load” on each new purchase.
  • Due to the premium of today’s unit value over today’s payout value. It may not make sense to buy units after a child is older than about 12, especially if monthly payments are being made.
  • Regardless of the type of college savings you intend to use, parents should make sure that they are fully funding their retirement first. There are no scholarships or loans to fund retirement if you happen to be short because you paid for your child’s college.

~ Gary Brooks, CFP® — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA
www.BHJadvisors.com

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Student loan overview — which is right for you?

Posted on April 30, 2012 | Leave a comment

Student loan debt now exceeds credit card debt. To get a better understanding of the various types of student loans and how to make decisions about which to use, this video is helpful. Financial aid expert Mark Kantrowitz discusses the importance of prioritizing federal loans over private lenders and offers guidelines for reducing future student debt. He reviews Stafford vs. PLUS vs. Perkins loans and provides other thoughts about managing college costs.

You can view the nine-minute video here: http://www.morningstar.com/advisor/v/55752443/a-study-guide-for-student-loans.htm

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

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The damaging pace of tuition inflation

Posted on March 19, 2010 | Leave a comment

The cost of a college education continues to grow very rapidly. This, of course, is not a surprise. News of tuition inflation has been prominent. Here in Washington state, the legislature is allowing state universities to raise tuition by 14% each of the next two school years.

The more startling fact is the disparity between growth in salaries and growth in education costs.

Consider these figures:

  • The average cost of tuition and fees across U.S. colleges increased 92% through the past decade. For comparison, the cost of the average new car did not rise at all and inflation of food was 32%. (Source: Business Week, Dept. of Labor Statistics, American Institute of Economic Research)
  • The cost of the tuition, fees, room and board at an average in-state public university has risen 6.2% per year over the past 20 years, reaching $15,213 for the 2009-2010 school year.  If college costs had instead risen only by the rate of the Consumer Price Index (general inflation) over the past 20 years (2.8% per year), then, funding a year of college would cost $7,889 for the current school year. (Source: College Board, Department of Labor)
  • While costs have risen, wages, salaries and earned income have been stagnant. The median salary in 2009 for someone with a Bachelors degree was 1% less than it was in 2000. For someone with an advanced degree (Masters, PhD) salaries grew by 1% over the decade. (Source: Business Week, Bureau of Labor Statistics)

Since the growth in earned income is so far behind the pace of college tuition, a parent saving for a child’s future college costs has to find a way to combat inflation. Either they have to save a whole lot more than planned or they have to hope an investment return can provide the heavy lifting necessary to keep up.

Washington’s Guaranteed Education Tuition (GET) program provides one option. It guarantees to match the rate of in-state university tuition inflation. There are drawbacks however. GET units can be applied to tuition at out-of-state or private colleges but they are not guaranteed to keep up with the tuition increases at those schools. And if you were to participate in the GET program through a periodic purchase of units over time, there is a 7.5% finance charge that essentially wipes out some of the inflation protection.

The other alternative is to fund a 529 plan, utilizing an investment strategy intended to outpace inflation. These plans allow for tax-free use of the growth on investments to pay for higher education expenses at any accredited school (private, 4-year, community college, trade school, etc.). With 529 plans, the owner accepts market risk but has the ability to save more than in a prepaid tuition plan such as GET. There are also no fees to administer a periodic savings program. The only fees are the management costs of the funds that are invested in. Given many plans to choose from, there are attractive options at very little cost.

We frequently advise people that it’s more important to save for retirement since there aren’t options like loans, grants, scholarships and work study to fund your retirement. But a shortfall in college savings leaves the unappealing likelihood of significant debt to be paid.

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