Charting Your Family’s Course Through College Finances

by | Jun 10, 2024 | Financial Aid

Need-based and merit aid can be an effective way to make college costs more manageable.  Another way is by creating a plan designed to maximize what you can do to effectively finance the college education.

Nicholas Ferbert, a wealth advisor from Baystate Financial, provided us with these valuable insights.  

As a wealth advisor providing financial planning services, I often meet families at the crossroads of education and finance, the beginning of a journey that requires careful planning. I imagine it like the process of preparing for a major expedition. Resources must be gathered, timelines planned, benchmarks for progress plotted, and the right crew will be needed. In my 12 years of helping families to prepare for this, I have seen firsthand the difference early planning makes. Every journey is different, but the planning itself follows a similar process, and it can mean the difference between a successful voyage and the dreaded, and avoidable, shipwreck along the way. In college terms that could mean debt, deferred retirement, and limitation of choices for your student.  Let’s take a closer look.

Getting Started: Our first task is deciding on the destination. This involves establishing a budget and examining what’s achievable versus what might stretch you thin. We want a goal that is within reach yet still inspires us to make the journey. This is often the most eye-opening part. It sets the tone for the entire college planning process.

The 529 Plan, A Vessel with Caveats: In these discussions, the 529 plan frequently surfaces as a common tool to help get from point A (setting aside funds) to point B (paying for tuition). The 529 can be a favorable wind at your back, offering tax-deferred growth potential and tax-free distributions for qualified educational expenses. But remember that this wind can change. Distribution of earnings for non-educational expenses can lead to federal, state, and even local income tax, plus a 10% federal tax penalty, so you must be sure about your course before committing to this vessel. Consideration should also be given to the pros and cons of how close you are to the college years.  You also want to keep in mind that the investments in a 529 plan are subject to fluctuation, and it is possible to lose money.

Timing Turbulent Seas: A great sailor knows that fortunes change with the wind. The same is true for the stock market. It has historically been a great long-term builder of wealth, but day to day it is hard to know what will come next. Investing in the right types of assets at the appropriate times is essential. Imagine you have college fully funded, but you only own volatile stocks. If the market drops when you need this money, suddenly the funds aren’t there. Yet, with no exposure to growth assets, how can you grow these savings effectively over time to begin with? Timing is everything, and this often involves a strategy that shifts risk over time, starting aggressive and becoming more conservative each year as college approaches.

Life Lines: Sometimes, there just isn’t enough time to save enough for college. Other times, there might be assets available, but using them could trigger high taxes. When a timely decision is needed, where do you turn? There are alternative sources of funding that can be used such as borrowing against certain assets. This approach will be unique to each family, but knowing what tools you have is important. Various asset types each come with their own risks and considerations. Knowing when, and if, to use these lifelines could be a lifesaver.

The Ebb and Flow of Cash Flow: Cash flow is the current beneath your vessel. If the tide runs opposite to your destination, it makes it that much harder to reach. Understanding how funding education affects your cash flows during the savings and payment phases of this process is vital, not just to achieving this one goal of funding college but also to ensuring the rest of your financial life remains on track. I often chart cash flow projections with families to help them visualize this, and this is easy to forget, despite being essential to financial stability.

Gifting and Taxation, Mapping It Out: Gifting for education is rife with nuances. The rules around taxes and gift sizes, like navigational charts of hazards among waterways, are detailed and full of consequences. Estate planning and gifting techniques offer the opportunity for parents and grandparents to address larger estate planning goals. Whether this involves setting up family trusts to support a range of goals, avoiding gift tax restrictions through direct payments to schools, or providing forgivable loans to family members, there is a maze of options that can be excellent paths if chosen correctly or real setbacks if not. 

The Importance of a Skilled Crew: This can all be achieved by working with Campus Bound and a skilled financial team. Every voyage relies on the right vessel, supplies, and plan, but also upon a seasoned crew. If my team or I can be of assistance, we are certainly happy to help, and you can reach me at nferbert@baystatefinancial.com.

This article is for general information only and is not intended to provide specific advice or recommendations for any individual.  Any performance referenced is historical and is no guarantee of future results.  Estate and tax planning must be obtained in conjunction with your Estate Planning Attorney, Tax Attorney and/or CPA as neither Baystate Financial nor Nicholas Ferbert provide legal or tax advice or services. 

Nicholas Ferbert is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. (www.sipc.org) OSJ: 1 Marina Park Drive, 16th Floor Boston MA 02210. 617-585-4500.

Nicholas is licensed to transact insurance business in CT, MA, NH, NY, OH, OR and is registered to transact securities business in CA, FL, MA, MD, ME, NC, NH, NJ, NY, OH, OR, RI, TX, VA.                                          CRN202706-6452249

 

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