It's never too late to start your college plan

http://www.savingforcollege.com/articles/it-s-never-too-late-to-start-your-college-plan-1071

The need for college planning has never been more important.

The cost of attending college continues to rise. The average cost of four-year private school during 2016-17 was over $45,000 - an increase of 3.4% from 2016.

The cost to finance an education will also increase. Rates on Stafford and Parent Plus loans are set to rise this July to 4.45% and 7% respectively. Additionally, the current administration is proposing to eliminate the federal subsidized student loan program, a program where the government pays the loan interest while the student is attending college.

For parents with children in high school, this poses a serious question. What is our best “Late Stage” planning strategy to pay for college without jeopardizing our own retirement? Here are some tips to consider:

Save

It’s never too late to start, even if your children are entering or in high school. Your best option is with one of two types of 529 accounts:

529 SAVINGS PLANS

These are state-sponsored savings vehicles that allow assets to grow tax-free. Distributions are also tax-free as long as they’re used for qualified educational expenses. Plan beneficiaries can be changed and the impact on financial aid is minimal. This makes them ideal “late-stage” savings vehicles.

Each state offers different investment options and some provide tax deductions for contributions. You will need to research your options or work with a financial advisor who specializes in college planning to determine the ideal plan fit and investment allocation.

529 PREPAID PLANS

Prepaid plans allow you to contribute funds that buy future tuition at current rates. They are offered by some states and also through the Private 529 Plan which is sponsored by over 300 private schools.

Unlike savings plans in which the chosen investments might lose value, prepaid plans shift the risk to the sponsoring entity. There are no fees and there is zero market risk. These plans make sense for families wanting a guaranteed return on their investment but can also can also be combined with 529 savings plans for a more diversified savings strategy.

RELATED: College Savings Timeline- The home stretch

College selection

One of the primary focusses of your college plan should be finding schools where your child will fit in best and graduate on time. Factors to consider are the size of the campus, its proximity to home, school curriculum, the relative competitiveness of the student body, class sizes, and social activities, such as fraternities and athletics. The key here is “check the boxes” off for a small number of schools that meet the profile of your child.

Once you’ve narrowed your search down to six to eight schools you can then focus on financial aid. Yes, the schools you select will to a large extent determine your eligibility for merit based financial aid. Your goal should be to position your child in the top 25%, from a grade and test perspective, of the incoming freshmen class. This will not only increase your chances of admission but also put you in a stronger position to receive financial aid in the form of grants and scholarships. If you receive a better financial package from a school other than your primary choice, you may be able to use that award as a negotiation tool.

Tax aid

An often overlooked yet valuable planning strategy for college planning is tax aid. For example, the American Opportunity Tax Credit can provide up to $10,000 toward the cost of college for each child. If you can’t take the credit yourself, find out if your child qualifies.

Consider the tax benefits of shifting appreciated assets, such as stocks, to your child. Your child can potentially sell the assets in his or her name to help pay for college, and pay taxes at a lower rate. Make sure that the additional income won’t impact need-based aid eligibility and that it properly navigates the "kiddie tax".

RELATED: Can I use 529 funds to pay for college and use the American Opportunity Tax Credit?

Do you have your own business? If so then hiring your child can provide tax benefits as well as business experience. The work must be tied to the business and the wages must be reasonable. One strategy would be to pay your child up to their standard deduction ($6,350 for 2017). They will not owe any income taxes and can use the proceeds towards the cost of college. If your child is under the age of 18 then you can avoid paying Social Security, Medicare and unemployment taxes like you would for a regular employee.

Your children will have far more options to pay for college then you will have to fund your retirement. Far too often families will mortgage their home, take out loans, access their retirement accounts or use their savings to pay for their child’s education. These actions can have serious implications on achieving your own goals. Developing a balanced college plan that incorporates saving and “late stage” payment strategies should help protect your own assets and help your children graduate with minimal student loans.

RELATED: Picking a financial advisor for your college planning strategy - What to ask

About the author: Brett Tushingham, CFP, is a financial advisor and the founder of Tushingham Wealth Strategies in Wilmington, North Carolina