Investing All-in-One For Dummies. Eric Tyson

two years to strike a balance. Alternatively, if you’re comfortable with the risk, get your money invested and get on with your life!

      

When you use DCA, establish an automatic investment plan so you’re less likely to wimp out of your strategy. Your money that awaits investment in DCA should have a suitable parking place. Consider a money market fund that’s appropriate for your tax situation.

Knowing the Impact of Investing for College Costs

      Many well-intentioned parents want to save for their children’s future educational expenses. The mistake that they often make, however, is putting money in accounts in the child’s name (in so-called custodial accounts) or saving outside retirement accounts in general. The more money you accumulate outside tax-sheltered retirement accounts, the more you will generally end up paying for college costs.

      

Under the current financial needs analysis used by most colleges and universities in awarding “financial aid” (that is, how much of their very high sticker price they will charge you), the value of your retirement plan is not considered to be an asset. Money that you save outside retirement accounts, including money in the child’s name, is counted as an asset and reduces eligibility for financial aid.

Also, be aware that your family’s assets, for purposes of financial aid determination, generally include equity in real estate and businesses you own. Although the federal financial aid analysis no longer counts equity in your home as an asset, many private (independent) schools continue to ask parents for this information when they make their own financial aid determinations. Thus, paying down your home mortgage more quickly instead of funding retirement accounts can harm you financially. You may end up paying more for college costs and pay more in taxes.

      

Make it a priority to contribute to your retirement savings plan(s). If you instead save money in a nonretirement account for your children’s college expenses, you will pay higher taxes both on your current income and on the interest and growth of this money. In addition to paying higher taxes, you’ll be expected to pay a higher price for your child’s educational expenses.

      Paying for college

      If the way in which the financial aid system works effectively encourages you to save in your own retirement accounts, how will you pay for your kid’s education expenses? Here are some ideas and resources:

       Home equity: You can borrow against your home at a relatively low interest rate, and the interest is generally tax-deductible.

       Company retirement plans: Some 401(k)s allow borrowing for educational costs.

       Student loans: Several financial aid programs allow you to borrow at reasonable interest rates. The Unsubsidized Stafford Loans and Parent Loans for Undergraduate Students (PLUS), for example, are available, even when your family isn’t deemed financially needy.

       Grants and scholarships: Grant programs are available through schools and the government, as well as through independent sources. Complete the Free Application for Federal Student Aid (FAFSA) application to apply for the federal government programs. Grants available through state government programs may require a separate application. Specific colleges and other private organizations — including employers, banks, credit unions, and community groups — also offer grants and scholarships.

       Work and save: Your child can work and save money during high school and college. In fact, if your child qualifies for financial aid, they’re generally expected to contribute a certain amount to education costs from employment (both during the school year and summer breaks) and from savings. Besides giving your teen a stake in their own future, this training encourages sound personal financial management down the road.

No one enjoys filling out financial aid forms. It’s difficult, intimidating, invasive, and stressful. Yet it’s a necessary step many families must take in order to make college more affordable. First, let’s clear up a major misconception: Receiving financial aid doesn’t actually mean you receive money for college. Rather it means they charge different customers widely differing prices based upon the college’s assessment of your ability to pay. Your goal is to position your finances to receive more favorable pricing. And doing that is not as hard as it may seem. Here are some tips:

       Assume that you qualify for financial aid. Financial aid consultants agree that you should assume you’re eligible. Don’t rule yourself out because of income or academics. And don’t rule out a college because you think it’s too expensive. The higher the cost, the more aid you may receive.

       Use colleges’ “net price calculator” to estimate your expected costs. No matter where you are in the planning process, there is a simple method you can use now to get a general idea as to what price you may pay at a given college or university (and therefore how much financial aid or discount you will receive from those institutions). Colleges are required to have a net price calculator (NPC) on their websites. The pricing among private colleges can differ by tens of thousands of dollars among schools driven by factors like how much equity a family has in their home.

       Fill out the FAFSA form online. The Free Application for Federal Student Aid — also known as the FAFSA form — is the starting point in applying for financial aid. You can complete the FAFSA form online (studentaid.gov).

       Don’t wait around to be accepted to a college to apply for aid. The coffers may be empty by spring, so get application forms completed as soon as possible. You’ll need the latest version of the federal FAFSA form. You may also need to complete the College Board’s CSS Profile application (cssprofile.collegeboard.org), state aid forms, and/or forms provided by the colleges. The FAFSA form and Profile become available for the next academic year on October 1 of the current year (meaning the soonest you can apply for financial aid for your first year of college is October 1 of senior year of high school).Parents, keep in mind that the questions presume that the student is applying for aid (even though parents fill out the form!). Be aware that questions like name, address, social security number, date of birth, and so on in the beginning part of the form refer to the student. Parent information is collected later in the form. Entering parent information in a student section is a common mistake, and it can cause problems for your financial aid application.

      

As Chapter 1 in Book 2 discusses, there are increasing numbers of faster and cheaper alternatives to traditional four-year colleges which lead to interesting and rewarding jobs and careers. For more information, pick up a copy of Paying For College For Dummies by Eric Tyson, MBA (Wiley).

      Considering educational savings account options

      You’ll hear about various accounts you can use to invest money for your kid’s future college costs. Tread carefully with these, especially because they can affect future financial aid.

      The most popular of these accounts are qualified state tuition plans, also known as Section 529 plans. These plans offer a tax-advantaged way to save and invest more than $100,000 per child toward college costs. (Some states allow upward of $300,000 per student.) After you contribute to one of these state-based accounts, the invested funds grow without taxation. Withdrawals are also tax-free provided the funds are used to pay for qualifying higher-education costs (which include college, graduate school, and certain additional expenses of special-needs students) as well as up to $10,000 per year toward K-12 school expenses. (The schools