All too often generations of students stumble through the college planning process. With college costs on the perpetual rise, it is critical to start the planning process early.

Whether you are a beginner to the college planning journey or refining an existing strategy, here’s a visual guide of some critical to-dos for students and impactful strategies for parents depending on your unique situation.

The FAFSA is a financial unlock for college students

The FAFSA is an application for federal student aid such as federal grants, work-study funds, and loans. It’s the largest source of aid to help you pay for college or career school. To qualify, the FAFSA considers the impact of income and assets from January 1 of your sophomore year of high school until December 31 of your junior year of college (assuming a student goes straight from high school to college). For a high school senior filling out the FAFSA in 2023 and graduating in the spring of 2024, you are looking at your prior-prior year’s tax return in 2021.

The FAFSA application window opens as early as October 1st and closes by June 30th of the year you receive aid (depending on the institution’s deadline). However, in 2023, FAFSA will not be available until sometime in December due to the FAFSA Simplification Act, reshaping the entire system. Details about this significant reform can be found in this article.

Follow our yearly timeline to make things a little less stressful

For high school students planning ahead for college, we’ve summarized the major considerations and to-do items. Download the PDF here to print and hang on your fridge.

We can help with education planning

College involves time, money, and emotions. By dedicating effort, you will spare yourself unnecessary stress later. Amidst all the school visits, tests, test planning, be deliberate and have a plan. If you have any questions or would like to speak with one of our advisors, please reach out to me here.

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A much needed update for families

The Free Application for Federal Student Aid (FAFSA) Simplification Act of 2021 was passed by Congress for many reasons. For starters, the calculation was originally defined over four decades ago in 1972 and is in some need of updating. According to the National College Attainment Network (NCAN), only 61% of seniors applied for aid in 2017 and 54% in 2021.

Some consider COVID to be the main culprit for this sudden drop, but the complexity of the form is the other main issue. Currently, students are required to answer 100+ questions depending on their family's income level. As of now the new FAFSA form changes are set to be released in December 2023 and students and parents alike need to be aware of the specific aspects that will apply in the 2024-2025 academic year that may impact aid eligibility depending on their family situation.

What’s changing and why it matters

1. EFC (Expected Family Contribution) replaced with Student Aid Index (SAI)

Short answer: Fairer access to funds for lower-income households.

One of the more obvious changes was renaming the EFC to the SAI. The goal was to not only reduce the confusion around the actual costs of college and what families are responsible for paying but also ensure access to Federal Student Aid programs including Direct Student Loans, Parent PLUS Loans, Work-Study programs, and even Pell Grants for low-income households. This number can be negative with maximum Pell Grants awards giving a student up to -$1,500 in money back. Time will tell but the largest impact will fall on middle to upper income families who will no longer be able to divide the number of college students in the household that are currently in college. For example, a family that could pay $40k/year could split the aid evenly between the number of students in college at the time. They no longer have this luxury and will see a reduction in aid.

2. Custodial parent status changes

Short answer: For non-married couples, the parent who ultimately claims the child as their dependent on their tax return will submit the FAFSA.

Currently, the FAFSA only collects income and asset data from the parent a student lives with. In cases of divorced, separated, or non-married couples who reside together starting in 2024-2025 school year, the SAI calculation factors in the parent who provides the greatest financial support. In cases of divorce and separation starting in 2023 the SAI calculation will only require the parent who provides the majority of “support” to fill out the FAFSA. One household might pay the child support but the other pays for the mortgage, groceries, and sports clubs. The implications of this decision can be significant.

3. Formula changes

Short answer: Students can qualify for more awards.

As with the SAI calculation, the number of students a family has in school is no longer a factor for Pell Grant eligibility. By completing the FAFSA, you are considered for the maximum amount of Pell grants first (based on number of people in your household) and your AGI (Adjusted Gross Income) compared to the FPL (Federal Poverty Line). If not eligible, your maximum Pell Grant amount will be subtracted by the SAI. Finally, you will still be considered for a minimum Pell Grant if no award is given. These other factors in the formula for aid are listed in no order but should be noted for your situation.

The student income protection allowance threshold was raised from $6,800 to $9,400.

• Businesses and farms that employ 100 or more employees will be considered an asset going forward

• Capital Gains from the sale of investments will be considered income on the FAFSA

• Child support received is now reported with assets NOT income

4. Student income from outside sources

Short answer: A student’s financial aid won’t be penalized for withdrawing 529 funds early.

Currently students must report gifts or distributions from a 529 owned by a non-parent (e.g. grandparents or other family members) or non-custodial parent if the student's parents are divorced. Due to the FAFSA’s prior income year rules, a student who needed access to those funds before Jan. 1 of their sophomore year of college would be penalized in the formula for the withdrawal. Now they are completely removed from the aid formula calculation.

5. New student allowances for the cost of attendance

Short answer: FAFSA will cover more day to day student expenses.

Although these are smaller changes, college students alike must not overlook these valuable new allowances that the FAFSA will allow students to claim for ancillary items. Not only is there a small allowance for personal expenses if a student works part-time but a personal computer purchase with no enrollment status requirement. You can even have an allowance for transportation between home, work, and school. More details can be found here.

Proactive financial aid resources to guide your family

For a current or future college student, utilize the free Student Aid Estimator.

If these changes make need-based options harder to attain, look for colleges that offer merit scholarships. This does not mean forgoing the FAFSA completely but intentionally seeking out Merit scholarships at specific institutions. This process, known as Early Action, is detailed in this article with a list of colleges that offer Merit Aid. We recommend starting this process early as many colleges recruit students as early as late spring of your child's junior year!

Finally, contact financial aid offices to see if they will be awarding institutional dollars based on the current formula not connected to the EFC/SAI numbers.

We can help with education planning

The FAFSA is changing for better or for worse and will affect how parents and students think about college for years to come. If it would be helpful to consult a team of credentialed advisors with expertise in college planning, schedule a call here.

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The cost of education, especially 4-year accredited university programs, continues to rise. The graphic below shows the average annual cost of college nationwide from 1980-2021 far outpacing the maximum Federal Pell Grants offered over the same time period. 

If there is an ability to pre-fund college, in whole or part, it will have lasting financial implications. Funding college early at the birth of a child or grandchild to a college savings account could reduce the future funding liability by six figures. 

In this article, we will discuss some ways you can start saving for your child’s education.

The most popular option, the 529 Savings Plan

A 529 College Savings Plan is one of the most popular options when saving for college. Not only does the money you contribute to a 529 plan grow tax-free but any distributions used for qualifying education expenses (tuition, room & board, books, computer, etc.), are tax-free as well. In the past, qualified expenses were limited to just tuition and boarding but recently the government has expanded this list. Beneficiaries of a 529 plan can also use the money to pay for trade school, community college, or even a 3-month certificate program.  

Oregon has a state-sponsored 529 Plan that allows residents to receive tax benefits for contributions they make to a plan in the state. This gives you a triple-tax benefit. Contributions to fund the account have a tax benefit, growth is tax-free, and qualified expenses are tax-free. There are also private plans that qualify under Oregon-state law. As of 2023, contributors can receive up to $300 in tax credits depending on their filing status and household income. As of 2023, families can contribute up to $17,000 annually in a 529 account. Anything after that is considered a “taxable gift” and subject to gift tax laws.  

Another feature about 529s starting in 2024 and beyond is that any leftover money up to a lifetime amount of $35,000 can be rolled over into the beneficiary’s Roth IRA.. For example, let’s look at two parents who invested $50,000 into a 529. Their child received a full scholarship to the college of their choice. The child ends up only spending $10,000 to cover other expenses during their time in college. That student can then roll over a lifetime amount of $35,000 into their Roth IRA account, as long as they have earned income and the 529 account has been established for 15 years.  

Coverdell ESAs act very similarly to 529 plans due to the withdrawals being tax-free for qualifying expenses. However, contributions are limited to $2,000 per child annually and are only available to families below certain income thresholds. 

Special accounts: Uniform Gifts TO Minors Acts (UGMA) or Uniform Transfers to Minors Acts (UTMA)

UGMA or UTMA accounts can help you save for college but aren’t just reserved for education. These accounts are savings accounts that are controlled by a parent or guardian, known as a “custodian.” You can gift up to $17,000 per year (as of 2023) in assets that are held in a custodial account until the child turns the age of majority (Age 18 or 21 depending on the state). In Oregon, the dependent cannot take over the account until they are 21.  

The custodian of the account can use this money only for the benefit of the minor to pay for things like food, education, and living situations. 

Pre-pay for college tuition and tuition discounts  

Unfortunately, in Oregon, there is no State-sponsored pre-payment plan for college tuition. There may be some private ones, but they are expensive. Some people do this in other states to pay for the full tuition during the current year rather than wait 17-18 years when prices go up even more. For your reference, here are states that offer pre-payment programs.

There is also a program known as the State and Regional College Tuition Discounts. Oregon has several schools that are members of the Western Interstate Commission for Higher Education.  

For more information about this make sure to research the WICHE site and Oregon’s student aid site.

Alternatives to college that can fast track career development

Despite the rising costs of college, there are other options to consider. College is not for everyone and you may decide not to send your student to college right away if you cannot afford to do so.  

Many high-paying and rewarding career paths do not involve a college degree like: 

• Computer programming and coding 

• Loan officers 

• Pilots 

• Plant operators and managers 

• Graphic designers 

• Trades like plumbers, welders, carpenters, farmers, etc. 

• Sales reps  

• Business owners and managers 

Community colleges, trade schools, and certificate programs are a fraction of the cost of a 4-year college program and in most cases pay well with little to no debt. Plus, 529 Plans cover these types of education programs too (certain restrictions may apply).  

Some 17-year-olds may not know what they want to do yet. They can work a job, apprentice under an expert, or even start their own business and find their passion before committing to a major program in college.  

If you need more advice, financial planners and advisors can assist you with planning for your student’s future. These laws vary from state to state so talking with a team of experts who are knowledgeable in this area is a wise choice.  

If you are looking to hire an advisor, please connect with us.

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On a recent financial planning call with colleague Amber Jones and a new client of our firm, we had a chance to discuss college savings for their daughter. It is always interesting to hear how families view college for their children and grandchildren. Some consider college a necessary expense, while others view college as an investment. Regardless of your college position, I thought it would be helpful to look at unemployment levels by education and income, based on the type of education an individual achieves. The numbers paint an incredible picture. Figure 1 underscores the importance of going to college. Not only are those with college degrees employed more consistently, but their annual earnings are nearly double those with a high school degree.

  Figure 1. Employment and income by education attainment

In short, Figure 1 makes a good case for encouraging your children (and grandchildren) to go to college. Yes, there are dozens of college alternatives, including starting a business or going to trade school. We all know successful individuals who never stepped foot in college or tried a university and decided it was not for them. I hope this article is taken in the way it was intended—that is, if college is an option, it is an excellent investment worth the sacrifice. 

Maybe you are a grandparent trying to think of a gift for your granddaughter—fund a college savings account. Maybe you are a parent wondering if college is a good investment—the answer is yes, fund a college savings account. Or possibly you are a teenager considering going to college—do what you can to make it happen. College is a sacrifice for families and for the one that is bold enough to attend.  Nevertheless, the payoff can be significant. As far as an investment goes, I can think of no better. 

If you have questions about college, funding a college savings account, or if you just want to have a thinking partner on the topic, call us; we would love to hear from you. College comes in many shapes and sizes. For example, a four-year degree, split between community college and Portland State University, averages less than $8,000 per year. Even if loans are required to meet tuition demands, the potential return on investment is immediate and over a lifetime, sizeable.

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Life Happens. Be prepared and consider buying life insurance.

But what kind? How does one navigate through the many types and attributes of life insurance products? To make things more complicated, high commissions create an unavoidable conflict of interest for life insurance agents, which can muddy the waters and lead to further consumer uncertainty.

To provide clarity, we will explore what life insurance is and provide a broad overview of the different policies that can be purchased. Someone’s lack of understanding should not get in the way of life insurance being a part of their financial plan.

WHAT IS LIFE INSURANCE?

Life insurance is an important tool to protect loved ones and/or business relationships. Most people should have some form of life insurance to provide cash flow in case of the inevitable.

A life insurance policy is a contract between a policyholder and an insurance company. In exchange for payment of premiums, the insurance company will pay a death benefit upon the death of the insured. The death benefit is a tax-free* sum of money paid to the beneficiaries of the policy, which are often family members.

If you have someone who relies on you for financial support, and you cannot self-insure, you need life insurance.

TYPES OF LIFE INSURANCE?

There are numerous different types of life insurance policies. Policies will vary in coverage, premium cost, cash value, investment risk, and flexibility. Of these differences, policies can be divided into two key groups: Term life and Permanent life.

Term — Term life insurance allows the policy owner to pay for coverage for a predetermined number of years, typically 5, 10, 20, or 30 years. For most, a term policy is the least expensive way to purchase a death benefit. The death benefit can be level or decreasing. Some will purchase a decreasing death benefit to match their decreasing mortgage debt.

Permanent — Permanent life insurance is just as it sounds. The policy owner may decide to have their life insurance policy last a lifetime (up to age 120), often requiring a lifetime of premiums payments. There are several types of permanent policies. Popular policies include Whole, Variable (VL), Universal (UL), Variable Universal (VUL), and Indexed Universal Life (IUL).

Key differences between a term policy and a permeant policy include price, length of policy, and a component called cash value. Permanent policies are traditionally more expensive. The higher premiums cover the cost of the death benefit (including administrative fees), and the remainder is added to a cash value.

Traditionally, the death benefit is used at death while the cash value can be used during the policyholder’s life. The cash value of a permanent life policy can be a tax-advantaged savings vehicle for the policy owner. Permanent policies are typically most advantageous once other tax-advantaged savings vehicles like your 401(k), Roth IRA, etc. have been exhausted. The cash value may be available to the policy owner to withdraw or borrow against. The cash value can accumulate in a variety of ways and is often distinguished by the type of permanent policy. See below for differences between common permanent policies and their cash value accumulation.

Whole Life — The insurance company takes on the responsibility to pay out a dividend which is based on the performance of an investment portfolio managed by the insurance company and their ability to keep their business expenses low.

Variable policies (VL & VUL) — The policyholder may invest the cash value in a selection of mutual fund-like sub-accounts. Variable policies provide a “variable” growth (& potential loss) of cash value as sub-accounts are connected to underlying investments.

Index Universal Life (IUL) — The policyholder may earn interest based on the performance of an equity index, think the S&P 500. While there is no actual money invested in the index, interest is credited to the cash value based on the performance of the selected index. IUL’s provide variable growth with a cap on maximum returns (cap rate). There’s also a guaranteed minimum annual return (floor rate often never less than 0). For example, an IUL has a cap rate of 8% and a floor rate of 0%. If the selected index grows by 20%, the cash value is credited a growth of 8% (cap rate), if the index loses value by -5% the cash value does not decrease due to the index (floor rate).

WHAT TYPE LIFE INSURANCE IS RIGHT FOR YOU?

This is our opinion, some life insurance agents and brokers with a conflict of interest may disagree.

You are young — Do you have plans for a family? This may be a great opportunity to purchase a term life policy. The younger you are, the less expensive premium payments will be.

You are the breadwinner — Term life insurance can replace lost income during working years. Life insurance prevents your surviving spouse (and children) to forgo their standard of living and helps meet the family’s financial obligations.

You are a stay-at-home parent — While there is no income number attached to a stay-at-home parent, there is a value associated with the services they provide a family. Term life insurance covering the years when kids are young can help cover the cost of child-care, housekeeping, and other responsibilities taken on by a stay-at-home parent. 

You own a home — For many Americans, a home is one of their largest assets and debts. Purchasing a term life insurance policy with coverage lasting the length of a mortgage can cover the remaining mortgage balance.  

You are a business owner — A life insurance policy is a multifaced tool for a business owner. A policy can help pay off business debts, pay estate taxes, and fund a succession plan like a buy-sell agreement. There are many variables to consider when choosing between term and permanent policies.

You have maxed out your retirement accounts — If you have maxed out tax-deferred retirement savings vehicles, a permanent life insurance policy can provide another avenue of retirement savings. Permanent policies build a cash value that can be accessed tax-free**. We do not typically recommend this to our clients because permanent policies are often very costly. The larger price tag can include investment costs (we commonly see 1-1.5%), administrative fees, as well as surrender penalties.

You want to leave an inheritance — Do you plan to spend all your retirement dollars, yet you would like to leave heirs with an inheritance? A permanent life insurance policy will provide a lump-sum benefit to your beneficiaries no matter when you pass away (can be up to 120 years).

You have a high net-worth — Permanent life insurance is best for those who are concerned about estate taxes. A lump-sum benefit at death is distributed to heirs to pay estate taxes, rather than selling-off inheritance.

Life is complex. As such, your situation may require multiple life insurance policies for you and your family.

WE ARE HERE IF YOU HAVE QUESTIONS

There are many options for life insurance. While Human Investing does not sell life insurance policies, we do help clients find the best policy within their financial plan. Having someone to help you navigate life insurance without incentive to sell you a product has immense value. If you have questions about what type of life insurance may be best for you, or how it fits into your financial plan, please contact us at Human Investing.

*Death benefit will be tax-free if it does not violate the “transfer-for-value” rule.

**Tax-Free-withdrawals up to basis then gain taken as loan.  Also, is not a modified endowment contract.

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Demand for better financial literacy is going up

Financial Literacy is the understanding of financial concepts which guides good money decisions in everyday life.

The backdrop of personal finance is having a structure for how to act. We usually refer to this as a financial plan. A financial plan helps to allocate money, a limited resource (for most of us), to unlimited alternatives.

Financial literacy can help parents make a difference

The United States is the largest economy in the world however, Standard and Poor’s Global Financial Literacy Survey reveals that it is the 14th in the world in Financial Literacy at approximately 57%.

By age 7, most children begin to grasp that money can be exchanged for goods and represent value. For example, understanding that 5 pennies equals 1 nickel, as a University of Cambridge research on “Habit Formation and Learning in Young Children” discovered.  Starting at age 7 or 2nd grade, a child is ready for more instruction and guidance around money concepts. In the same way that children learn language from their parents, they can and do learn money habits from their parents but need exposure and  instructive conversations. Moreover, children need the opportunity to practice with money, or forms of money, that have different representations of value.

Financial literacy can lead to responsible decision making

Parents have the ultimate authority and responsibility to begin educating on financial concepts from a young age. Parents should be aware not to rely on the education system to teach the basics or complexities of personal finance, as it is not required to graduate in many states (ex: Oregon).

To help empower parents with the knowledge and tools to provide a great foundation for personal finance, let us refresh ourselves of the basics of what children can learn and apply early in their formation. Always remember to keep it simple.

Start with an approachable framework

The four basic functions for allocating money is to Spend, Save, Invest, or Give. A guideline to start with is a 30/70 rule: save, give and invest 30% while spending the remaining 70%. To create a basic guideline for our kids (and possibly even ourselves), let’s break each of these functions down.

The heart of giving

Let’s start with giving, since many of us have experienced that if it is not given up front, it may not be given at all. This is important in establishing an altruistic worldview (selfless concern for the wellbeing of others) but also in teaching an abundance mindset (always more to go around) as opposed to a scarcity mindset (only so much and never enough). Giving can immensely impact a child’s desire to be a force for good and help others, which is the foundation for business. When banking a dollar per week from allowance, even with this small amount, it can be a great place to start the heart-healthy habit. Ask your child what they care about and who they would like to help with their giving, it may surprise you.

The necessity of saving

A similar principle will prove necessary for saving. It is much easier to set aside some money prior to spending to ensure you will have something left over when needed. Having adequate savings can keep you from being subject to predatory lending or missing out on an opportunity. It is equally important to help kids understand that saving is not the same as investing. It is important to have money working for you, not just set aside and available to you.

The value of investing

The importance of investing is compounding interest and seeing your hard-earned dollars multiply for you in a way that seems effortless but requires patience and self-control.

Setting money aside to help a child invest in a company like Disney or Nike, something they can tangibly see and enjoy, is a great learning lesson. This could be done through your taxable investment account or in their own UTMA (child’s investing account).

If the former idea is too involved or the money is not available for buying actual shares of companies, consider offering your child a “matching program” when they invest in the “Parent Company”. In the same way, consider offering your child interest (growth) for leaving their savings with you. They may need a greater incentive to understand the concept and value of having their money grow. Based on the child’s age, show them a toy that costs $1 and a toy that costs $10. They could spend their $1 weekly allowance collecting numerous low cost and low value toys, or they could save and potentially even grow their dollars to achieve a valuable toy more quickly. This would help provide the incentive to invest those dollars rather than spend them or even save them.

Lastly, teach the rule of 72. An investment that grows 7% annually will double in just over 10 years (72/7=10.2). An investment that grows by 10% annually will double in just over 7 years (72/10=7.2).

The discipline of spending

A great place to start is needs and wants. How much should be allocated to needs and what is left for wants. A rule of thumb is 50% for needs and 20% for wants. Without a credit card line, this is much easier to do when working on a cash basis. Until kids are old enough to have expenses like cell phone, auto insurance, gas, it will be difficult to break out needs versus wants. Until then, spending will be all one category at 70%. Once the child is a high schooler, they will experience more reasoning between needs and wants. What is left over is available for “fun money”.

It will be important to discuss the topic of credit versus debit as credit cards are a form of debt and borrowing from an institution will have numerous negative effects on saving and investing.

Another concept to teach when considering spending is discounts and coupons. When paying less for a specific item, you have more left over for other items or for saving, investing, or giving. One of the best places to teach this is looking at a specific product at the grocery store (candy bars!) and comparing prices, those on sale and those that are not and the impact of spending less to keep more.

The compounding benefits of financial literacy

Financial literacy, like investing, has compounding benefits especially when starting young. It is invaluable to model and have conversations around money with your children. No need for perfection, but the goal is to make progress and provide opportunities to learn.

This article was inspired from a presentation by Mac Gardner, CFP®, author of “The Four Money Bears”.

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Why Save for College?

For many reasons, planning and saving for college is essential. The pursuit of a college education is a wise investment. In most cases, college graduates will earn significantly more over their lifetime than those who opt out of post-secondary education. However, this comes at a high cost. Beyond the purchase of a home, the decision to pursue higher education is commonly the second largest expense of an individual’s/family’s lifetime. Importantly, the inability to save and plan for college early can dramatically impact assets set aside for other savings goals such as retirement or paying off a primary residence.  

You Can Fund Your College Tuition Out of Pocket and with Loans

Let’s say for whatever reason, funding college now for your child is not an option. The estimated annual cost of college at a four-year, in-state university is $27,000. When including inflation, from birth to sending a student away to college, total costs are estimated at over $190,000. Assuming you or your child, through student loans, need to borrow to fund schooling, the estimated cost balloons to nearly $250,000, which includes interest at 5% on the borrowed tuition over ten years.  

Or You Can Start Saving at Birth

Using the same assumptions as before, but this time you pre-fund college (start now) over the course of 18 years at $6,000 per year. You should have just about enough to pay the balance of school. In short, the savings of $108,000 over 18 years, plus the growth of $88,500 (just over 6% compounded monthly), covers the cost of higher education.  

What’s the Difference?

Funding college early reduces the future funding liability by six figures. If there is an ability to pre-fund college, in whole or part, it is a great choice with lasting financial implications. By saving at the birth of a child or grandchild, a family could save approximately $140,000 per child ($250,000 versus $108,000), if they desired to fund 100% of college expenses at a 4-year, in-state university by saving to a 529 plan versus paying through student loans.  

Paying with a home equity line of credit (HELOC), a student loan, or even out of present cashflow should be avoided if possible. Even less optimal is pulling funds from retirement accounts. Although sometimes necessary, taking retirement account distributions to pay for college will potentially increase your tax bracket and the could be subject to penalties. More importantly, it reduces assets available for your retirement when earning additional income is often difficult. 

What are the Benefits of 529 College Savings Plans?

Your 529 Dollars Will Grow without Being Taxed. There are a plethora of benefits for a 529 account—but the most important is tax-exempt investment growth. If 529 funds are used toward qualifying education expenses (tuition, room & board, books, computer, etc.), there is no taxation on the earnings. If the college savings account has remaining funds after all tuition is paid, the parent or custodian could change the beneficiary to another family member or sibling. If there are no other beneficiaries to use the funds, the funds can be drawn out and used for anything. However, if designated 529 funds are used for the “anything” bucket, the growth on the account will be taxed at ordinary income levels and earnings will be subject to a 10% penalty. 

If the student receives a scholarship, funds equal to that amount of the scholarship could be withdrawn from the 529 and not subject to a 10% penalty, but there would still be ordinary income taxation on the earnings withdrawn for purposes other than qualified education expenses.

Another benefit of a 529 plan is that it has a low impact on FAFSA, in qualifying for federal aid.   

You Can Maximize Tax Credits. Depending on the state in which you live, there may be a state tax deduction for contributions to a state-sponsored 529 plan. For example, if you live in Oregon, you can receive a state tax credit of 5% of your contribution up to 100% of your contribution, depending on income limits. The maximum tax credit in any year is $300. There are also college tax credits on tuition that may be available depending on your income level. 

It is important to coordinate the use of your 529 plan dollars with your tax advisor to maximize these potential credits.

COLLEGE SAVINGS PLANS ADAPT AS YOUR CHILD APPROACHES COLLEGE

College savings plans have a shorter overall time horizon than a typical investment or retirement account. If an account is open when the child is born, 18 years will pass before funds are set for distribution. By the time the student is applying for colleges, funds should be invested more conservatively so as not to put funds at risk of loss at the time of liquidation and use for college expenses. As a rule of thumb, the earlier you start saving, the more aggressive you can be—but as college approaches, getting more conservative is a wise approach. This can often be solved with an age-based, target-date fund offered by 529 plans, in which the investments automatically adjust from stocks to bonds and cash as the child approaches college. 

Talk about These Things During “Windshield Time”

There are many financial considerations when sending your children to college. Optimally, you and your significant other are making a choice early in life about how you hope to partner with your child in paying for school—if at all. If the choice is to help pay for some, or all expenses, discussions surrounding what paying for school looks like is essential. 

Does paying for school include a two-year stint at a community college? What about a state school, private school, or a school of their choice? Each of these questions and considerations are great for a road-trip—something we like to call “windshield time.”

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As a parent of a five year-old, my wife and I cherish our occasional date nights together. For some reason, serious topics and concerns about our family seem to come up during those times. One evening we found ourselves discussing our out-of-date Will that we completed before my son was born. We both agreed that the decisions we made back then needed to be updated. We revisited questions like, “If both of us were to pass away, who is the right person to take care of our son? How much money would he get from us? Would he be responsible enough to handle that money when he turns 18?” For most of us, conversations like these tend to go nowhere and we move on with our busy lives. This task then falls into the dreaded pile of “things we need to do.”

As human beings, we are experts at procrastinating, which is evidenced by a recent survey that showed that 72% of adults either had no estate plan or their plan is out-of-date1. I have experienced many people admitting that they need to create/update their estate plan but never take the action needed to complete it. Common reasons I have heard over the years include:

• “I’m really busy right now and I will do it later”

• “I’m not sure if I need it”

• “I don’t know where to go to get it done”

• “I am concerned about the cost”

SO HOW CAN WE REMOVE THE BARRIERS THAT PREVENT US FROM DOING WHAT WE KNOW IS IMPORTANT? 

In my experience advising clients on estate planning, I have found the following tips help remove these barriers:

• GET A “WORKOUT” PARTNER - Similar to exercising with a partner, finding a partner to keep you accountable can greatly increase your odds of success. Tell your advisor that this is an important goal for you and ask them to make it part of their follow-up service. If you don’t have an advisor, ask a friend or family member.

• GET EDUCATED - Becoming informed and taking the time to understand why removes much of the uncertainty, helping you feel comfortable and motivated to take the first step. Ask your advisor for an education session. If you know an estate planning attorney, you can check to see if they will provide a complimentary first meeting where you can ask questions. Another option is to do your own research on websites like the Oregon State Bar Association http://www.osbar.org/public/legalinfo/wills.html

• GET PREPARED - Establishing your goals and making a handful of key decisions ahead of time makes your meeting with the estate attorney more productive and can save you money if they charge by the hour. In addition, it helps create progress and momentum so that the process does not stall. Ask your advisor or an estate attorney if they can provide you with a questionnaire to help you prepare. Then carve out about an hour with your spouse/partner to write down information and discuss key decisions that require thought and debate. Examples of these preparation items include:

• Decide who will be the guardians of your minor children.

• Decide who do you want to be the beneficiary(s) of your assets and how would you like them to be distributed.

• Decide who will be in-charge of managing and carrying out your plan after you pass away.

• Determine your view of the probate process.

• Prepare a list of your assets, debts and any life insurance.

• Prepare a list of your personal information – names, dates of birth, contact information for yourselves, children, beneficiaries, etc.

• GET A REFERRAL – Ask your advisor, friend or family member for a referral to an attorney who specializes in estate planning AND SCHEDULE A MEETING. Scheduling a meeting creates a deadline that will help you to move forward with the process. At Human Investing, we will often facilitate the first step by scheduling the meeting for our clients. Ask your advisor to help you take this first step for you.

• LASTLY, REMEMBER WHY THIS IS IMPORTANT - An estate plan protects the people and causes you care about the most in life. Keeping this in mind can provide the motivation you need to see it through.

CONCLUDING THOUGHTS

With just a little focus and help, you can “check the box” on completing/updating your estate plan. My wife and I did end up turning that date night conversation into a new, updated estate plan by following the above tips. Now we have peace of mind and can have more enjoyable, light-hearted conversations going forward.

 1The USLegalWills.com survey conducted by Google Consumer Surveys, June 2016.

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If you are looking for the best way to save for your kids’ future college expenses there isn’t necessarily a “one size fits all” solution. In fact there are a number of choices available, each with their own list of benefits and features. The 529 plan is probably the most common and well known option. Similar to a Roth IRA, a 529 plan offers tax-free growth as well as tax free withdrawals as long as the money is used for higher education expenses. This isn’t limited to major 4-year universities either. Most 2-year schools, community colleges, and trade schools qualify under the program.

In addition to tax free growth and tax free withdrawals, if you use your home-state sponsored plan (such as the Oregon College Savings Plan), your contributions may be deductible against your state income tax. These features make the 529 plan very attractive for those who want to maximize their savings for college.

One of the drawbacks of a 529 plan is the limited flexibility in the use of the money. For example, if your child does not go to college, or if they qualify for a scholarship, parents may have to pay a 10% penalty and income tax to otherwise access the money. So for parents who want to save for their children’s college but want to retain flexibility in case they decide to use the money for other purposes, then there is a better option.

For ultimate flexibility a parent can use a traditional brokerage account and invest the money for growth just like a 529 plan. With this option, you give up the tax benefits of the 529, but there are no restrictions on how the money is used and for whom. If the money is managed in a tax efficient manner, this can be a great alternative for many families.

One more option is a UTMA or UGMA account. These stand for Uniform Transfer to Minors Act and Uniform Gift to Minors Act. These accounts offer a middle ground between the two prior choices. On one hand, the money doesn’t have to be used for college expenses, but the account does have to be used for the benefit of the child only. There are also some tax benefits to these accounts as some of the growth may be taxed at the child’s tax rate, which is typically lower than the parent’s rate.

In summary, if you want the best plan to purely maximize college savings, the 529 is the best option. If you still want to provide savings for your kids, but aren’t 100% certain if you’ll need access to those funds down the road, then the other choices can be managed in a way to provide a very similar benefit, while providing additional flexibility.

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