Q and A with Denisa - Children and College :: Certified Financial Planner : Colorado Springs, CO

Dear clients, colleagues....friends

We are moving our COLORADO SPRINGS office location on June 1st

to:

The downtown PLAZA OF THE ROCKIES
121 S. Tejon, Suite 1107, Colorado Springs, CO 80903

Q and A with Denisa - Children and College

6. Children and College

You have recently asked for ideas about the best financial gifts for kids and also whether you should follow in your grandparent’s footsteps and give Savings Bonds. While you are looking for gifts that teach positive $ values, it’s important that you make it fun!

Consider paying your kids an allowance as early as they become interested in money, typically around age 5-6. It teaches them responsibility.

As for creative gifts:

Piggy banks with multiple chambers for Saving, Spending and Giving - make a great gift for your pre-schoolers. Kids will have to plan and divide up their allowance into the Saving, Giving and Spending ‘tummy’. It teaches them about balance between savings and reward. You can get the piggy bank online from www.moneysavvygeneration.com.
When they turn about 9 or 10, open a savings account, and together look at the monthly statements and explain to them about interest.

Young teens - help them open up a checking account with a Debit card. They will have to learn how to balance their checkbook.

More importantly, get them excited about investing. Instead of a low interest Savings Bond, have them put a portion of their allowance into a mutual fund each month. On a special occasion, like birthdays, you can even match their investment.

As for you teenagers who are watching this - drop me a Tweet or an email and let me know about your $ habits.

"Denisa, we would like to set up 529 plan for our two kids, ages 4 and 6 but there are so many to choose from. What should we look for and how do they work? Melissa"

ANSWER:

A 529 plan is an education savings plan.

There are two main types of 529 plans, Savings Plans and Prepaid Plans.

Savings Plans work much like your 401(K) by investing your money in available funds. Your account will go up or down in value based on the funds' performance.

Prepaid Plans let you pre-pay the costs of an in-state public college education.

What makes 529 plans so attractive is the fact your money in the plan grows tax-free but it is also tax-exempt when you pull the money out to pay for qualified education expenses. What you may not know is that the funds can be used for any accredited college, university or vocational school.

Despite the industry's continuous effort to improve 529 plans, there remains two important areas to focus on:

The selection of funds available in the plan; the more funds, the better.
Fees charged by the plan

Morningstar has recently released its annual study of the best and worst 529 plans. In its study, Morningstar focused on the underlying funds, expenses, diversification, and asset allocation. Click on the link to check out their findings.

To compare features on some 529 plans, visit www.savingforcollege.com.

From: Peggy

"We have three kids (ages 8, 12, and 16) whom we would like to put through college. However, we do not want to wipe out our retirement savings or go to debt doing it. Please advise what to do."

ANSWER:

Due to high cost of college education, many parents are looking for funding alternatives. It often comes down to borrowing at high interest rates or wiping out retirement savings.

I have been doing research to find alternative funding resources and I was surprised how much is available out there. First of all you have to make it a priority. Even if your child is barely in middle school, start now.

Ben Kaplan who has received more than two dozen scholarship awards, almost enough to cover his Harvard tuition, shares his resources with parents at www.scholarshipcoach.com, and he advises:

Browse the scholarship listings at your local school
Check national scholarship organizations such as Reserve Officer Training Corps (ROTC) or the National Merit
Search free internet scholarship databases
a. The key is to search many databases but watch out for scholarship scams. You should never have to pay for scholarship information.
b. Don't get discouraged if your child doesn't excel at school because some merit-based scholarships consider personal interests and talents, not just the GPA.
c. Encourage your middle-school student to participate in national award competitions. There are thousands of essay writing contests and the prizes typically range from a couple of hundred to several thousands of dollars.
Earn free credits
a. Have your high school students take advanced placement courses to build up credits that they will not have to pay for in college. They are Advanced Placement (AP), College-level examination program (CLEP), or the International Baccalaureate program (IB). They can accumulate enough credits equivalent to an entire year in college.
Additional college cost savers are attending a community college and then transferring, pursuing an accelerated program in college, or joining the military.

Here are a few of those on-line scholarship sites to get you started:

Scholarship Search at: http://apps.collegeboard.com

Fast Web at: www.fastweb.com

Wired Scholar at: www.collegeanswer.com

From: Jane
Age: 18 - 24

"I know that it is becoming tougher to get private student loan to fund college tuition. How should I shop these loans and what other source of funds are there?"

ANSWER:

Due to the credit crunch, several lenders (Bank of America, Wachovia, for example) have suspended their private student loans. Other financial lenders are tightening up loan terms, requiring strong credit scores and often a co-signer. If you receive a loan, prepare for higher interest rates (average 12%-14%, up from 10%-11% last year www.finaid.org).

Other sources of funding:

Scholarships

Canvas community resources (service clubs, business organizations, foundations, etc.)
Search Internet scholarship databases
a. www.scholarships.com
b. www.collegeboard.com
c. www.petersons.com
d. www.colleganswer.com
e. www.fastweb.com

Financial Aid

Government loans and grants. If you feel you have exhausted all other avenues, consider this option to secure a private student loan:
Pull your FICO score from www.annualcreditreport.com (you pay a nominal fee to obtain your score)
Check your score against the lender's minimum credit score requirements
FICO requirements: a score of 650 to 680 (vs. 620 last year); some will consider nothing lower than 700

Many college students are graduating with an uncertainty as to how they will be able to unwind their college debt. Who is to blame? The University, the lender, or the parent? Regardless the answer, here are some things that you and your future student should look at to be better prepared.

Do a little math with your student. If he borrows $20K per year for tuition, he may be stuck with eighty grand when he graduates. The chance of him walking into a job that pays $100K the first year is not very realistic. The study from the National Association of Colleges and Employers show that the average salary offered to 2010 graduate is $48,351!
So, keeping this in mind, prepare a preliminary budget to show your student how much he would have to live on after the debt payment.
Do your homework early. Research the best inexpensive colleges in your area.
Don’t underestimate scholarships. Even a modest award of $1,000 will go a long way if you are paying $500 per credit hour!!

Financial Advice for Your College Grad

You are glowing with pride seeing your son or daughter recently graduate from college. One of the best graduation presents you can give is obviously a good financial wisdom. Let’s look at examples of some smart gifts for your college grad:

A new suit to look sharp for that first interview
Gift of cash to help jump start a Roth IRA or an emergency fund
Offer to match all or a portion of their investment
You can pre-pay a subscription for a financial magazine
Something that maybe not as exciting, yet a very practical gift may be a small filing cabinet to help them stay organized with their financial records

As your college grad continues on to the next chapter of his life, it is essential that he build good financial habits. Help him understand how to make a decision about things like buying vs. renting a home, or the importance of investing in a 401(k).

And...if you simply don’t have answers to those financial questions, send me an email, and I will be happy to recommend a good money-smart book for your grad to read.

GRADS, JOBS AND MONEY

Tonight I want to talk to our graduates who are looking for work this summer. You are certainly facing tough challenges. With the unemployment rate twice the national average, the competition is fierce.

So here are a few tips to make you stand out.

Let’s start with your resume. If you are a college grad, you need to clearly describe the value of your degree. For example if you majored in Philosophy and you are applying for a position with an accounting firm you need to somehow show the connection between the two.

If you are a high schooler and you are looking for your first job, make sure to list your community service work and also your leadership experience. These demonstrate good work ethic and strong character.

Be smart with your first paycheck. I know that after spending years at school, it can be instantly gratifying to blow some of your money on stuff. But by delaying some of your gratification and investing your money instead, you will able to afford a much more later on in life. So, get in a habit of stashing 10-15% of your paycheck every month into a Roth IRA and leave it alone.

Financial Aid Application

Tonight, let’s talk about financial aid for your college bound kids. Parents are often concerned that if they own any assets, their child may not qualify for financial aid. Here is how it works:

The Government uses a formula, called an Estimated Family Contribution to determine how much a family can pay toward the cost of education. Obviously the lower this number is, the more your child will get in the financial aid. Let’s talk about what goes into this number.

The child’s assets count more heavily than the parent’s. Specifically, the Government includes 20% of the child’s assets and only less than 6% of the parents’ assets. This is why parents want to keep as many assets in their name, like the 529 college savings plan that is counted as their asset.

As far as what goes on your financial aid application - your bank accounts and investment accounts will have to be listed. Your retirement accounts like IRAs or 401Ks do not. However, if you withdraw money from your retirement accounts, it will count as taxable income on your next year's financial aid application.

This is a very important topic but it can be very confusing. So don’t hesitate to email me with questions.

Last week we talked about how your income and assets may affect the amount of financial aid that your child receives. Today, I want to answer a question from our viewer that expands this topic.

Judi wrote, "We are divorced and we share the custody of our son equally, so which parent should fill out the Financial Aid application?"

For divorced parents, it is the parent with whom the child lived the most during the past 12 months. Since Judi and her husband shared an equal time with their son, then the parent who provided the most financial support during the past year should fill out the application. This would typically be the parent who claimed the child as a dependent on his or her income tax return.

Staying on the topic of college education, a new student aid reform has been approved by congress. A couple of highlights of what this means for your wallet:

On student loans taken out after July, 2014 students will have to devote only 10% of their income to repay their loans, down from 15%!
Also, the loans will be forgiven after 20 years of repayment, down from 25 years!

Cathy wrote to me asking for tips about buying a car for her teenage son.

Cathy, my 16-year old is in process of getting his driver’s license, so we are actually facing the same issue. We have determined that he was responsible enough and on a ‘selfish’ note - we would get our life back.

First, you want to prepare a budget together. Don’t forget to include not only the purchase price of the car or the cost of the financing, but also gas, oil changes, and car insurance. Talk to your insurance agent whether it is cheaper to add your son to your policy or get him a new policy.

In deciding who pays for what, let him share some financial responsibility. I personally like the idea of having a contract with my son, where he agrees to be responsible for paying all traffic tickets and any damages, but also not to drink and drive, and to keep his car clean and properly maintained.

Finally, a few safety tips for our young drivers:

No drag racing!
Always wear your seatbelt
Don’t talk on your cell phones and definitely NO TEXTING. If you must talk, use a speaker phone mode or pull over
This one should be a no brainer...DON’T DRINK AND DRIVE.