Category Archives: College Money

Start Saving for Your Child’s College Education Today

Today’s author–Dr. S–is a dad, husband, and finance professor. He discusses personal finance and financial independence on his site, Bull in Captivity.

 Wow, this is a must-read. Really shows the importance of starting to save for your child's college education early--like right now early.

Making sure that our children start their lives off without financial stress is a goal I can get behind. Turning 18 and jumping into reality is tough enough already. Adding the burden of student loans and financial hardship is not a comforting send off.

Unfortunately, college tuition is on the rise, and many students face the reality of not being able to afford higher education without supplementing their part-time income with student loans.

College Board estimates a 2017 annual college budget of $25,000 for state colleges and $50,000 for private schools. Parents seeking to reduce their child’s reliance on debt for college can start saving for their child’s education. But saying, “Start early,” isn’t good enough. It’s important to see the impact of early savings.

Importance of Starting Early

Because of the short time span of fewer than 20 years, college funds have a limited amount of time to take advantage of compound interest. This means that you should start investing as soon as possible. This timeline is equivalent to someone beginning to save for traditional retirement at 45. It’s not impossible, but the timeframe is considerably shorter.

Look at these three examples: Monica, Rachel, and Pheobe. Monica starts saving for her child’s college education as soon as the baby is born. Rachel waits until her child is eight before saving and Pheobe begins on her child’s 13th birthday.

Here are the results assuming that they all contribute $100 per month ($1,200 by the end of the year) and earn 8% on average per year.

compounding interest on college savings

As you can see, Monica has more money in the college account than both Rachel and Pheobe. The higher balance is not only due to the additional contributions Monica saved, but the interest on these investments.

Monica is earning compound interest, or interest on interest, the most powerful force, as described by Albert Einstein.

In its basic form, compound interest means that after year 1, Monica invested a total of $1,200. In year 2 though, in addition to contributing $1,200, she earns interest on year 1’s contributions. In year 3, in addition to another $1,200 in contributions, she earns interest on year 1’s contributions, year 2’s contributions, and (here’s the compound interest) the interest she earned in year 2 on year 1’s contributions.

I know it’s a mouthful, but the interest is acting as another contributor to the account. This is why starting early is so important. The sooner the savings begins, the more chances for compound interest.

Riskiness of Investments

In the previous examples, I assumed a return of 8%. This return is not unrealistic but is a return expected for stocks–which are risky.

As college nears, the account should not be invested in very risky investments. The worst thing that can happen is that the summer before your child starts college the stock market crashes and there simply is not enough time for the account to recover.

To mitigate this risk, the account will be invested in less risky assets as college approaches, for example, bonds. Here is an example of an asset allocation that becomes less risky as college drop-off day nears.

529 asset allocation

The average expected return for the portfolio is highest at the beginning of savings and drops as college gets closer. Higher risk, higher expected return. The lower risk only makes problems worse for Rachel and Pheobe in our example above. Not only do they have a shorter timeline to invest than Monica, but the returns they have available for compounding are less than Monica.

conservative 529 during childs senior year before college

Reusing the same table as before, but with the new expected returns, we see that the results are only amplified. Monica still does better than Rachel and Pheobe, but Pheobe’s account is not looking good.

Is it too late?

There are a few options available if you have not started saving as early as you would like for college education.

  1. Start now!
  2. Increase contributions. Instead of $100, you may have to invest $200 to get to the same goal as if you started saving when your child was born.
  3. Lengthen the timeline. Delaying college for a year or two through a gap year or community college are great ways to give you more time to save.
  4. Remember that every dollar helps. Just because you can’t pay for every dollar of your daughter or son’s college education does not mean you have failed. There are plenty of ways for students to pay for college including part-time jobs, grants, scholarships, and finally loans. Depending on the degree, a few loans are not the end of the world for your child. The loans would be even higher without your help.

College Savings Accounts

A 529 plan is the most popular college savings account. The withdrawals from this account must be used for school or a penalty is placed on the account, so if your child decides not to go to college, this could be a problem.

The IRS has a great Q&A resource on 529 plans.

Many states offer college plans with tax deductibility benefits. You will be able to save for college pre-tax, which helps you increase contributions. Many of the requirements and benefits for college savings plans are state-based so doing a brief search on your state’s options will give you a wealth of information.

Have a disabled child? Check out ABLE accounts.

Other options include a traditional brokerage account which is just an after-tax investment account. There are no tax benefits, but you can use the money for anything including buying your child’s first home or even starting a retirement fund for your child if college is not an option.

At the end of the day, any benefit you provide for your children going to college will be a big help. However, starting early means a bigger account from both your years of contributions and more importantly the help of compound interest.

How to Write A Successful Scholarship Essay

These are great tips for writing a successful scholarship essay. I'm liking her track record, too.

A few weeks ago we talked about finding scholarships that give you good odds of getting awarded. But that’s just the first step. Now you actually have to apply, and a large part of your application is usually your essay.  After

I found the right approach to picking scholarships, I used this method and was awarded for everyone that I applied for.  It’s not a one-size-fits all strategy, but it is a one-size-fits most.

Don’t Tell a Sob Story in Your Scholarship Essay

While some scholarship essays will give you very specific and unique prompts, most of them come down to two basic questions:

“Why do you need this money?”

and

“Why should we give it to you?”

When presented with these questions, it can be very tempting to write the saddest sob story you’ve got. There are two reasons you shouldn’t do this.

The first is that someone will always have a sadder sob story than your own. Trying to compete in this way is almost always futile.

The second is that while your story may stir up some empathy, that empathy may not be enough to answer the second question. When someone considers awarding someone a large sum of money, they want to see the merit of the person. Horrible things that have happened to you are just that: things that have happened to you. Show them instead how you have built skills to be able to deal with difficult situations.

Do Use Your Scholarship Essay to Highlight Your Strengths

To begin, think of some adversity or hard decision you have experienced in your life. Brainstorm a few, as the hardest thing you’ve ever dealt with may not be the best thing to write about relative to the question or prompt.

To decide which experience is the best one for your essay, ask yourself, “How did I react? Did my reaction turn the situation around to end on a positive note or make my story one of triumph rather than tragedy?“

Now make sure you can take that experience and turn it into an anecdote. Stories make for a much more fun read for those reviewing essays.

Tie Your Story Back to the Prompt

Once you have your first draft of your anecdote, highlighting the characteristics and qualities that have made you successful, make sure to tie it back to the prompt.

Briefly cover why you need the money. You may have bills, children, a mortgage, or simply tuition rates that are outside of your economic capabilities.

Then remind the reader why you deserve that scholarship money. Reiterate the characteristics you displayed in your anecdote that will make their investment in you a good one.

Perhaps you’ll use your empathy in the world of medicine.

Perhaps you’ll use your motivation to achieve highest honors while in school.

Perhaps you’ll use your perseverance to apply for scholarships rather than just give up and say, “I can’t afford college.”

Revise Your Essay

Now that you have your entire scholarship essay written, go back and revise it. Make sure there are no grammatical errors. Make sure it makes sense. Make sure it flows well. Get someone else who will be honest with you to proofread it before sending it in.

Revision is the writer’s best friend.

 

 

Have you been awarded a scholarship?  What approach did you use in your essay?

How to Pick a Major Without Wasting Money

I never would have thought to reach out to potential mentors so early on, but it's a very good point. Great tips for choosing a major.

 

It’s hard to know what you want to do right out of high school.

Shoot, it’s hard to know what you want to major in even if you go back to school at thirty.

You may think you have it all figured out, but then you get three years into the program and realize you hate the field. And you’ve spent how many tens of thousands of dollars on tuition?

Before you start your course of study, here are some options to consider when exploring your major and potential career path.

Enter as a General Studies Major

Entering as a general studies major allows you to explore a world of courses without being tied down to one.  You can get  your general education credits that will apply to most majors without having pressure from your advisor to immediately start on your major requirements or electives.

I know when I was entering college, I would have scoffed at the following piece of advice:

Seriously consider community college.

I thought I was too good for these “lesser” halls of scholarship when I was seventeen, but in the long term, community college was my saving grace. It’s affordable education that, if planned properly, can transfer to the institution of your choice.

Entering as a general studies major, or really any major, at a community college can save you thousands during your first two years.

Take Time Off

I rarely advocate putting off education.  Many people start down this path with good intentions only to never return to get their degree. It’s a dangerous path to tread.

But out of everyone I’ve met that has taken a Gap Year and subsequently returned to college, not a single one regretted it.

One of my friends spent time discovering herself in Brazil.

I know someone who WWOOFed in New Zealand.

I’m close with several others who just spent time traveling. This time allowed them to examine themselves, their interests, and how they relate to the world around them, all of which can have major impacts on what you decide to study and how you want to work long-term.

Explore Your Interests

Take some time and make a list of things you like to do. You’d be surprised at how many different career paths there are and how you can make a living doing what you already know you love.

Passion in a career makes all the difference in your life and the impact you have at work, though that’s not to say you can always make money by pursuing you passion.

Once you have your list of interests, sit down with a guidance counselor or a career counselor. See what they can tell you about applicable majors, and what potential careers you could have once you earn your degree.

Have an interest that you’ve never explored before? Take a class in it. Whether it’s at your community college, your university, your community center, or even your library, taking a course can give you an idea of if you love the area enough to work in it for the rest of your life.

Talk to Someone in the Field Before Choosing Your Major

Send an email or give a call to someone who works in the field with prepared questions about what you they do everyday and how the future of the industry looks. You’d be surprised how many professionals respond when you seek out their expertise.

Take any opportunities you can to shadow. If you don’t like the job you originally had your eye on, see if they know about any peripheral career paths that may fit your skills or interests better.

This is also a great way to begin networking before you even graduate.

Remember: You Don’t Have to Do Four Years

There are fields that pay extremely well without a Bachelors degree. To learn more about them, check out your local vo-tech school, applying the same strategies as above.

These fields will require some type of training, and usually include an apprenticeship. Another synonymous term you may see pop up is “journeyman fields.” Sometimes the apprenticeship is paid, and sometimes it’s not, but at the end you’ll come out with a skill that–if you’ve vetted the profession properly before starting your program–can earn you a nice income.

Although statistically speaking, those with a four-year degree make more money over the course of their lifetimes than those without, the real key is to make sure you are a trained and skilled professional in a field that has good career prospects.

If you put meaningful effort into the training, whether it be at a four-year school or through a journeyman program, you’ll come out ready to earn.

The Best Money Tip for College Students

This really is a great money tip for college! It's not always fun, but it's how I got through my program without a lot of cash.

College is such an exciting time, no matter what age you enter the halls of scholarship.  You’re learning, expanding your potential, making friends, and exposing yourself to new opportunities every way you turn.

It’s also a time when you’re cramming for exams, spending more money than you ever thought possible, and your available hours to work and earn money are at an all-time low.

The single best money tip for college students isn’t exciting. It isn’t earth-shattering. In fact, it’s pretty boring.  But it’s also incredibly important:

Best Money Tip for College Students? Budget!

I cannot stress enough the importance of sitting down with a pen and paper (or computer and mouse) and getting all of your numbers out in black and white.  I always encourage people to budget liberally and spend conservatively.  It’s better to end up with more money than you thought you’d have than less.

As a college student, you’ll want to do some long-term budgeting along with short-term.

Long-Term Budgeting in College

The financial decisions you make in college can have a major impact on the rest of your life. Make sure you pay attention to long-term financial decisions such as:

  • How much is my tuition going to cost me each semester?  How am I going to pay for it? Loans?  Scholarships?  Working a job?
  • How much can I realistically expect to make when I graduate to pay back any loans?  How long will it take me?
  • How much can I expect my books to cost each semester?
  • How much will membership dues for any clubs/fraternities I’m in cost?  How often are they due?
  • How much will my room and board cost?  Is getting an apartment more or less cost effective?
  • How will I handle transportation?  How much will it cost me each month to either keep up a car or pay to use public transport?
  • How much do I need to be setting aside to build a healthy emergency fund for if WHEN something unexpected comes up?

Short-Term Budgeting for College Students

Once you’ve got the long-term budgeting issues taken care of, break them down into short-term solutions. These are the little decisions you’ll have to make at least once year–some of them should get attention no less frequently than once per month:

  • How much is my rent/room and board this month?
  • How much are my books this semester?
  • How much do I need to spend on food?
  • Where is my next check coming from?
  • How much do I have allotted towards entertainment? If you’re not eating this month, your entertainment budget is probably too high. If you’re not enjoying a single moment as a student, it’s probably too low.
  • What other day-to-day bills do I have to pay and when are they due? Don’t miss due dates; late fees are a waste of your hard earned money.

Tips to Fix Your College Budget

Writing these numbers down can be scary.  If you’re like most students, you’re probably seeing more red than green.  But having them written out helps you see the reality of your situation. Once you’ve started facing reality, you can focus on ways to handle and improve your situation.

Like:

Money in college isn’t easy.  Budgeting isn’t usually exciting.  But it is the best way to make sure the financial decisions you’re making now are setting you up for success rather than failure later in in life.

Save Money by Refinancing Your Student Loans

Student loan debt in our country is insane. I managed to dodge it through grants and scholarships, but many of my peers are drowning in it.

It’s gotten so bad that it has eclipsed both credit card debt ($74 billion nationally) and auto loan debt ($1.14 trillion nationally.) The grand total nationally for student loans sits at $1.28 trillion.

That’s insanity. There are ways to bring that number down. Presumably, later this year, the first of the Public Student Loan Forgiveness (PSLF) loans will be forgiven. Some states and cities will pay off your student loans simply for moving in. And certain professions in certain states will garner you some forgiveness, as well.

If you don’t fall into an advantaged program, though, one of the quickest and best ways to lower the amount you owe and end up paying over the course of your loan is to get a lower interest rate.

Don’t believe me? Take a look at this infographic from PenFed featuring real people:

I'd like to be like Marissa--smart move on refinancing her student loans!

How Marissa Saved On Her Student Loans

My favorite example here is Marissa. By refinancing, she lowered her average interest rate from 7.50% down to 4.29%. That’s a reduction of 3.21%

On top of that, she shortened her loan term. When you pay a loan over longer terms, you almost always end up paying more in interest, simply because you’re paying it for a longer period of time. By shortening your term, you can cut down how much you pay in interest.

That’s what Marissa did.  Over the course of her loan, she saved an incredible $144,281 in interest. That’s almost as much as the original refinance amount of $148,000.

Head turning.

Finding the Best Interest Rates

As with any purchase, the best way to find a good interest rate is to shop around. There’s been quite a stir lately as states have started opening or reinstating state refinancing options. Some are good. Some are meh. Some are open to the entire country while some are open only to residents who attended school in their home state.

The lowest fixed interest rate I’ve seen offered through these programs is 3.99% in Kentucky. While they’re open to several states, they’re not open to all—including my home state of PA.

That’s why I was super excited when I saw PenFed’s announcement last month that it is now offering interest rates on student loan refinancing as low as 3.50% fixed. They’re also open nationwide. All you have to do is join PenFed, and applying is super easy to do.

Granted, with either program you have to meet certain eligibility and credit criteria to get the lowest rate. But there is more possibility for saving with PenFed’s interest rate floor.

To find out your rate estimate, you can answer three simple student loan refinancing questions here. It takes less than 30 seconds. Seriously.

A Word of Caution on Refinancing Federal Student Loans

Before refinancing any Federal student loans, research your options. There are several advantaged programs, like income-based repayment, PSLF and REPAYE just to name a few. These and other programs offered by the federal government can save you a ton of money over the course of your loan, and you lose access to them permanently if you refinance with either a state program or a private financial institution.

Learn more about programs for Federal student loans here.

 

Have you ever refinanced your student loans? Tell us about your experience in the comments!

 

*This post is in collaboration with PenFed Credit Union. The views expressed in the article are the views of the author and do not necessarily reflect the views of Pentagon Federal Credit Union.*