By Daphne Hu, Vice President and Wealth Manager, Goldman Sachs Personal Financial Management
From the moment children start crawling and walking on their own, parents are right there to offer help and a guiding hand. It’s an instinct that’s so hard-wired, it never goes away. Year after year, parents are there to help with skinned knees, math homework, baseball practice, piano lessons, prom dresses, getting a driver’s license, and even paying for college.
But as much as parents want to help their children, some might not be financially able to help with everything, especially when it comes to college tuition. Sometimes what parents want to do runs up against the reality of how much they can actually afford to do.
That’s where a financial advisor can come in. An advisor can help parents understand all the ways we can work together to make college more affordable. And whether that work begins when their children are toddlers or if they’ve already started applying for schools, the process always starts with a few tough questions. Here’s how I go about helping parents prepare for college costs.
Before I do anything else, I first need to get a sense of my clients’ intentions. While many parents are eager to help their children as much as possible, not everyone defines “help” in the same way. On top of that, most of us have limited resources, so major financial expenses like college must often be weighed against other financial priorities, like retirement.
So the questions I ask are intended to reveal what parents would like to do, and what they’re actually capable of doing.
The first question I always ask is, “Are you willing?”
This question helps me understand the parents’ intentions. Some may have the resources but aren’t willing to completely cover the cost of college. Or any of it. Some parents may want their children to contribute part of the cost so they have some skin in the game. Sometimes parents even disagree between themselves as to how much they can or should help.
Other parents might be willing to do everything possible, but that may leave them in a bad spot, financially. Especially when it comes to their own financial future. My job then is to make sure they have all the information they need to make an informed decision.
That leads to my second question. “Are you able?”
Once I determine how much help parents want to give their children, I need to determine what’s financially possible. Sometimes there’s a big difference between what parents are willing to do, and what they’re able to do. In that case, I’ll help them understand the implications on their own financial future, as well as any trade-offs they may need to make.
As for making trade-offs, that doesn’t mean all is lost. It simply means we’ll need to work a little harder to find a way to get there. The goal is to determine what parents can afford without risking their financial success.
That often leads to my third question. “Does it have to be this school?”
Many parents encourage their kids to set their sights on top-tier schools. That’s understandable since graduates of these schools tend to be successful.
But all good schools have their fair share of successful alumni. So I try to help parents weigh the cost of the very top schools against the value of the education their child will receive. If we’re trying to find an affordable solution, sometimes it makes sense to consider a highly-rated school that offers more financial assistance.
Once I’ve asked all my questions, I’ll have a pretty good idea of what everyone wants. By putting those preferences against the finances, I can see just how far we have to go.
I’ll start by helping set expectations based on what I learn from speaking with you. I’ll explain just how much college may cost, and how some schools offer more generous packages of financial aid than others. Then depending on the circumstances, I might ask, doesn’t it make sense for your child to attend a school that’s working just as hard to cover the cost as you are? This is especially important if we’re trying to narrow a big financial gap.
I prefer my clients always act in their financial interest, but if their hearts are set on a certain school we will work diligently to find a more manageable solution.
Of course, paying for college is easier if you start preparing years in advance. When you start saving early, you give your assets the most amount of time to grow. You also want to be honest with your children and make sure to set realistic expectations.
Just because you’re willing to help your kids, you still need to be honest without overpromising. But by helping, it shows them that you’re doing your part, which can make it easier for your kids to understand what’s expected of them and hopefully work a little harder.
There are generally two sources of money to pay for college. The first is your own money, including assets, income, and personal loans. The second source includes grants, scholarships, and financial aid. So, here are a few things to keep in mind:
Start small. Setting aside even a small amount regularly is perhaps one of the most important steps you can take. Out of sight, out of mind. And it’s essential to start saving as early as possible.
Start early. The most important component of any successful investment plan is the amount of time you give yourself. So the earlier you start, the more time your money has to potentially grow.
529 Plans. There are a wide variety of college savings plans, but 529 plans may be the most well-known and popular. These plans allow you to set aside money in a tax-deferred account. If that money is used for qualified education expenses, the account becomes tax-exempt since you’ll pay no taxes on the money you’ve earned. Before you open a 529 plan, however, I encourage you to consult with a tax professional to see whether it’s right for you.
If you have the means, you also have a unique opportunity to front-load your child’s 529. That means you can deposit up to 5 years’ worth of contributions at one time without triggering gift tax. That’s $75,000 for each beneficiary as of 2020.
And contributions are not restricted to parents, either. Grandparents, aunt, uncles, even close friends can make contributions to a student’s 529 plan.
That kind of help could really push you toward your goal.
Finally, there’s a bit of misinformation floating around about 529 plans. Let’s dispel those myths right now.
Some people worry that having a 529 will prevent them from getting financial aid from a college. But, that’s not true. A 529 plan owned by a parent is considered an investment and will typically reduce aid by just 5.64% of any amount greater than $10,000, according to Cappex.
Others have the opposite concern – that their child will get a full scholarship and won’t even need the money in the 529. If that happens, you have two options. You can simply change the plan’s beneficiary. Or you could withdraw the money and pay income taxes on the gains.
FAFSA. When your child starts applying for college, you can determine your financial aid eligibility is by using the Free Application for Federal Student Aid (FAFSA). If you think a government loan fits into your plan, the application is generally made available on October 1 for the following academic year, and you can list up to 10 schools you want to receive your results.
Financial aid. The moment your child has a short list of schools he or she is interested in, take the time to find out about available financial aid and each school’s application deadlines. You can also utilize the Net Price Calculator from the U.S. Department of Education.
Or you can visit each school’s website to get an idea of the expected out-of-pocket expenses. The process for calculating financial need varies by school, so if you have questions about how much you can comfortably contribute to your child’s tuition, you can always speak with a financial advisor.
Much like buying a home, a college education may be one of the largest expenditures you’ll ever make. So being ready for it means working with a financial advisor who really knows you, then creating a plan and sticking with it.
Of course, the more time you give yourself, the closer you’ll likely get to your goal. Plus, it could help motivate your children to work harder in school if they see their parents putting in as much effort as they are to get there.
Planning also allows you to better balance your financial obligations today with achieving your objectives tomorrow. So you can live your life today – and give your children the future they deserve.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.
Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.
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