Rethinking College Finances

From scholarships to 529s to financial aid, saving and paying for a child’s college education can seem complex. Just what does it take to get a student through college these days? And how and when should you prepare?

Many parents begin planning for college tuition as soon as they get their first ultrasound. But even with early planning, putting a student through college is getting more and more difficult.

According to Dr. James Johnston, Founder of SAGE Scholars, a provider of educational funding strategies focusing on college savings and tuition planning, many parents don’t save anything for college, or don’t save enough.

“The average 529 plan has $12,000 in it,” Johnston says. “No matter where you go to school, you’re not going to go far on $12,000.” According to Sallie Mae’s survey “How America Pays for College 2009,” the average cost of one year of college attendance for the 2008-09 school year was $15,931. Assuming students attend four years of college and the cost of tuition rises each year, the total cost would likely be more than $64,000.

“How America Saves for College 2009,” another survey by Sallie Mae, found that four out of five parents with children under age 18 said they intend to pay at least half of future college costs. However, only 29% of families are on track to reach their savings goal, the study found.

There are a variety of reasons parents haven’t saved as much as they should, Johnston says, such as tight finances due to the current economic environment, and other saving priorities like retirement. In addition, many parents don’t understand how to save, he says. “There’s some inertia due to a lack of understanding,” Johnston explains. “Families don’t understand the college funding system.”

Tuition Rewards

It’s because of this lack of knowledge that Johnston created the Tuition Rewards program. Through this program, families save or invest with certain financial partners, such as First Midwest Bank, and they earn annual Tuition Rewards points, which are converted into guaranteed tuition discounts at participating schools. For example, if a student accumulates 10,000 Tuition Rewards points, he or she is guaranteed to receive a minimum tuition discount of $10,000 (spread equally over four years) at a participating college or university.

Typically, you can earn Tuition Rewards by saving or investing with a financial partner. In most cases, you’ll earn Tuition Rewards points for your accounts and balances1. As your assets grow, so do your Tuition Rewards points.

In 2008 and 2009, Tuition Rewards points valued at $16.2 million, accompanying 1,856 applications, were submitted by more than 1,000 students to 174 member colleges.

In addition to programs like Tuition Rewards, parents use a variety of methods to save for college. According to Sallie Mae, 73% of parents used between two and four savings vehicles, and 12% used five or more. Only 15% used a single college savings vehicle. The top three savings vehicles among respondents were savings/money market accounts/CDs (59%), stocks or bonds (41%) and 529 college savings plans (33%).

Increasingly, it’s not only parents putting money toward a child’s education. According to a 2008 Hartford Financial Services Group, Inc. survey, 65% of grandparents plan to contribute to their grandchildren’s college education.

529 Plans

Named after Section 529 of the Internal Revenue Code, 529 plans are administered by individual states, which determine the plans’ structures and investment options. Withdrawals from these accounts for qualified education expenses are tax-free.

There are two types of 529 plans: prepaid tuition and savings. Prepaid tuition plans are currently available in a handful of states and allow for the pre-purchase of tuition based on current rates. Although most plans allow investors from out of state, there can be significant state tax advantages and other benefits to investing in your own state’s 5292.

According to Chris Dunlap, Financial Consultant with First Midwest Financial Network, a 529 plan is a great way to approach long-term college savings. “We encourage parents to start saving as young as they can,” Dunlap says. “What makes people successful is starting young and being disciplined. They should make contributions often over the long-term.”

One of the benefits of a 529 plan is that the parents or account owners have complete control over how withdrawals are made, as long as the funds are put toward qualified education expenses, such as tuition, room and board, and school supplies.

For example, parents can choose to receive all the 529 funds at once to completely cover the first year of college, or they can choose to receive funds gradually over four or more years, Dunlap says.

If the intended beneficiary ends up not going to college, receives a full scholarship or can’t use the college funding for any other reason, parents can transfer the assets to another beneficiary, such as another child or grandchild. “There’s flexibility to move around and make sure it does get used,” Dunlap says. “You’re not forced to take it out and incur a penalty. There’s no date by which you have to take it out.”

So what if you only have one child and he or she receives a full-ride scholarship? The beneficiary can be changed. Options may include a future grandchild, a niece or nephew, or even back to yourself. “You can name yourself a beneficiary and go back to school,” Dunlap says.

Ways to Pay

As families turn to multiple vehicles to save for college, they’re also using multiple vehicles to pay for college.

According to Johnston, historically, families paid for college using three vehicles: scholarships, loans and work study programs. Although these forms of payment are still prevalent, many families are beginning to consider other ways to reduce the overall costs of college. For example, according to Sallie Mae, the most commonly cited cost-saving measure taken was the decision to live at home, which was acknowledged by 51% of families. Attending a less expensive school was also a common cost-saving measure, taken by 48% of families. Military service was the least common cost-saving measure taken by students, with only 2% of families saying the student served in the military in some form to make college more affordable, the report found.

In addition, Johnston says many students choose to teach, because in some states they can receive financial forgiveness on part or all of their loans for teaching in certain disadvantaged areas. He says other cost-saving methods include taking college-level courses while in high school. This option requires an agreement between high schools and colleges or universities to allow credits to transfer.

The True Cost of College

Even though many families are becoming increasingly savvy about finding ways to pay for college, many still don’t realize how much college actually costs. When most people think of college costs, tuition is all that comes to mind. But once you factor in living expenses, travel, extra-curricular activities, books, computers and school supplies, the true cost of college far exceeds tuition.

“Many people just don’t realize how much it’s going to cost,” Johnston says. One of the biggest expenses parents don’t expect is the cost of books, he says. “Most people are shocked at what books cost. It’s nothing for a textbook to be $160. You need to budget north of $1,000 a year for books.”

In addition to textbooks, many parents – and students – don’t realize that the typical college education might take more than four years. He says the majority of public university students don’t graduate in four years. Private schools, on the other hand, tend to have higher rates of students who graduate in four years, Johnston says.

When many families look at colleges, they dismiss private schools because tuition there tends to be higher. “But there’s a chance you’re going to spend five years at a public institution, and only four years at a private school,” Johnston says. “When you consider that fifth year of school tuition, plus the lost wages or salary from the extra year you could be working, the costs are pretty similar.”

Investors should consider the investment objectives, risks, charges, and expenses associated with a 529 Plan carefully before investing. The issuer’s official statement contains this and other information about the investment. You can obtain an official statement from your financial representative. Read carefully before investing.

1. Points awarded on loan products receive a one-time credit and do not continue to accrue annually. First Midwest Financial Network investment product account balances do not earn Tuition Rewards points. Opening a First Midwest Financial Network investment product account earns Tuition Rewards members a one-time bonus of 100 points. Balances in these accounts do not earn Tuition Rewards points.
2. Consult a tax advisor.

Online Workshop

From savings to scholarships, paying for college is an involved process. To learn more about planning for college finances and how First Midwest Bank can help, view our “Rethinking College Finances” online workshop.

This workshop, offered through First Midwest Bank’s Financial Balance Series, will provide strategies for saving and paying for college, as well as include more information about our Tuition Rewards program.

To view this workshop, register online at firstmidwest.com/workshopregistration.

College Savings Plans

With so many savings options available, choosing the right type of account can seem confusing. Use this chart to learn about the pros and cons of each type of savings vehicle, and then speak with your First Midwest Banker or Financial Consultant to determine which strategy is right for you. You can also try our college planning calculators at firstmidwest.com/calculators. 

 

 

How it Works   

ProsCons
529 PlansParents make contributions to these plans, which earn interest based on market conditions.Investments compound over time, under normal market conditions.Because the investments are tied to the market, they can lose value.
Coverdell Education Savings AccountsParents contribute up to $2,000 per year into these interest earning savings accounts.Investors can determine how the money is invested. Growth is tax - deferred and withdrawals are tax-free.Contributions are limited to $2,000 per year, and these accounts are only open to investors with a modified adjusted gross income under $110,000 for singles and $220,000 for couples filing jointly.
UGMA & UTMAUniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are custodial accounts, typically controlled by a parent, and must be used for the minor’s benefit. Deposits to a custodial account are considered an irrevocable gift.Savings are protected for 18 or 21 years*, depending on the state.The child gains legal control of the assets at age 18 or 21*, depending on the state, and may choose not to use the money for college. Also, because assets are in the child’s name, these assets can affect the child’s eligibility for financial aid.
Tuition RewardsParents receive Tuition Rewards “points” based on their banking accounts and services, and deposit and loan balances. These Tuition Rewards points can accumulate and are used to reduce the tuition costs at participating colleges and universities.As your First Midwest banking relationship grows, so do your Tuition Rewards.Points can only be accumulated on accounts and balances at First Midwest Bank.
 

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