College Costs: The ABC Discussion Method with Your Children

It’s August. A time families are preparing to send a child to college and/or families are gearing up to help their high school student begin looking for colleges to begin the application process.  College costs can be staggering.

You and your children should understand the aspects of the price tag for college

If you’re the parent of a high school student who’s looking ahead to college, it’s important to have a grown-up conversation with your child about college costs. A frank discussion can help both of you get on the same page, optimize the college search process, and avoid getting blindsided by large college costs.

An initial conversation: a, b, and c
As a parent, you need to take the lead in this conversation because most 16-, 17-, and 18-year-olds are not financially experienced enough to drive a $100,000 or $200,000 decision. One approach is to start off saying something like: “We will have saved ‘a’ when it’s time for you to start college costs, and after that we should be able to contribute ‘b’ each year, and we expect you to contribute ‘c’ each year.” That will give you a baseline of affordability when you start targeting colleges.

A more in-depth conversation: borrow x, pay back y

Once you start looking at colleges, you’ll see that prices vary, sometimes significantly. If a college costs more than a + b + c above, you’ll have to fill the gap. The best way to try and do this is with college grants or scholarships (more on that in a minute). Absent grant aid, you’ll need to consider loans. And here is where you should have a more detailed conversation with your child in which you say: “If you borrow ‘x’ you will need to pay back ‘y’ each month after graduation.” Otherwise, random loan figures probably won’t mean much to a teenager.

You can use an online calculator to show your child exactly what different loan amounts will cost each month over a standard 10-year repayment term. For example, if College 1 will require your child to borrow a total of $16,000 at 5%, that will cost $170 each month for 10 years. If College 2 requires $24,000 in loans, that will cost $255 each month. A loan amount of $36,000 for College 3 will cost $382 per month, and $50,000 for College 4 will cost $530 a month, and so on. The idea is to take an abstract loan amount and translate it into a month-to-month reality.

But don’t stop there. Put that monthly loan payment into a larger context by reminding your child about other financial obligations he or she will have after college, such as a cell phone bill, food, rent, utilities, car insurance. For example, you might say: “If you attend College 3 and have a student loan payment of $382 every month, you’ll also need to budget $40 a month for your phone, $75 for car insurance, $400 for food…” and so on. The goal is to help your child understand the cost of real-world expenses and the long-term financial impact of choosing a more expensive college that will require more loans.

Even with a detailed discussion, though, many teenagers may not be able to grasp how their future lives will be impacted by student loans. Ultimately, it’s up to you — as a parent — to help your child avoid going into too much debt. How much is too much? The answer is different for every family. One frequently stated guideline is for students to borrow no more than what they expect to earn in their first year out of college. But this amount may be too high if assumptions about future earnings don’t pan out.

To build in room for the unexpected, a safer approach might be to borrow no more than the federal government’s Direct Loan limit, which is currently a total of $27,000 for four years of college ($5,500 freshman year, $6,500 sophomore year, and $7,500 junior and senior years). Federal loans are generally preferable to private loans because they come with an income-based repayment option down the road that links a borrower’s monthly payment to earned income if certain requirements are met. Whatever loan amount you settle on as being within your range, before committing to a college, your child should understand the total amount of borrowing required and the resulting monthly payment after graduation. In this way, you and your child can make an informed financial decision.

If there’s any silver lining here, it’s that parents believe their children may get more out of college when they are at least partly responsible for the college costs, as opposed to having a blank check mentality. Being on the hook financially, even for just a small amount, may encourage your child to choose courses carefully, hit the books sufficiently, and live more frugally. Later, if you have the resources, you can always help your child repay his or her student loans.

Target the right colleges
To reduce the need to borrow, spend time researching colleges that offer grants to students whose academic profile your child matches. Colleges differ in their aid generosity. You can use a net price calculator — available on every college website — to get an estimate of how much grant aid your child can expect at different colleges. For example, one college may have a sticker price of $62,000 but might routinely offer $30,000 in grant aid, resulting in an out-of-pocket cost of $32,000. Another college might cost $40,000 but offer only $5,000 in grant aid, resulting in a higher $35,000 out-of-pocket cost.

Summer Activities: Home Rentals and Temporary Workers

Summer allows for many activities outside of your normal routines. You can work less, head for the beach or mountains and possibly consider renting your home. Or you may be a small business owner that requires more workforce during the summer, so you hire temporary employees. Both of these out out of norm activities may have income tax implications.

Home Rentals

An often asked question is – If I rent my home out for two weeks each year. Do I have to show this rental income on my federal tax return?

If you rent your principal residence to others for fewer than 15 days per year, any rental income you derive is not considered taxable income. However, if you rent your principal residence for fewer than 15 days per year, or if you do not rent your home at all, the only home-related expenses you may deduct are the following:

Interest on loan(s) secured by the residence (i.e., mortgage interest), subject to certain limitations

    • Property taxes
    • Casualty losses

Maybe the home you’re renting is a second home or vacation residence. If you rent a second residence for fewer than 15 days per year, that home will be considered a second home for tax purposes. As was the case with your principal residence, any rental income you receive will be exempt from federal income tax. Also, you may not deduct expenses related to the renting of the property. However, you will be allowed to deduct casualty losses, mortgage interest, and property taxes you pay on the home during the year, subject to the normal limitations on mortgage interest deductions on primary and second homes.

If you rent a second residence for 15 days or more per year, and your personal use of the property exceeds the greater of 14 days per year or 10 percent of the days rented, your residence will be considered a vacation home for tax purposes. All rental income you receive will be reportable. Along with the usual deductions for casualty losses, property taxes, and mortgage interest, you may be able to deduct expenses for insurance, repairs, utilities, and depreciation (under certain conditions).

Different tax rules will apply if your property is considered to be strictly rental property.

Temporary Workers

As a business owner, what should I know about using temporary workers? If you’re planning to ramp up your temporary staff this summer, here are a few things to know.

Generally, temporary work is any work that is not intended to be permanent or long term. Temporary work can be full- or part-time. Use of temporary workers (sometimes referred to as temps) may provide you with some flexibility to handle employee absences due to illness, vacation, or maternity leave. They may also help you handle special projects, busy times, or seasonal work.

Temporary workers can be hired directly or through a temporary employment agency. Temporary workers you hire directly, even if part-time, are generally treated the same as full-time workers and may be entitled to employee benefits through you. For example, a worker who completes 1,000 hours of service in a year may be eligible to participate in your retirement plan.

On the other hand, a temporary employee hired through a temp agency works for the agency, not for you. The employment agency is generally responsible for the temporary employee’s benefits, if any. The hourly wage rate you pay to the agency may be higher as a result.

The temp agency can save you time and effort by finding and screening potential employees so that you don’t have to. The agency may have a pool of workers available at any time and at a moment’s notice. The screening, in particular, may be worth the extra cost in the current tight job market.

However, you may need to break in or train a temporary employee each time you get one from the employment agency. To minimize this, you may request that the employment agency send a temporary employee who has already worked for you before.

Sometimes a temporary employee may become a permanent employee. If an employee was hired through a temporary employment agency, depending on your contract with the employment agency, you may need to pay a fee to the agency if you permanently hire the temporary employee.

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2 Major Avenues For Paying for College

Paying for College

In midsummer many people are preparing to move to college in the next few weeks and colleges are preparing the financial packages for new and returning students.   As many media outlets have covered and as many college students and parents know – college is expensive. There are several avenues to pay for college. Two ways to consider are federal financial aid and the tax-advantaged 529 Plans which were expanded with the new tax laws..

Federal Financial Aid

For the federal government to determine your child's financial aid eligibility, you must first complete its aid application known as the Free Application for Federal Student Aid, or FAFSA. The FAFSA requires specific income and asset information from both you and your child. Independent students do not need to list their parents' information.

A specific formula is then applied that results in a figure known as the expected family contribution, or EFC. This figure is the amount of money your family must contribute to college costs for the year before the federal government awards any financial aid. The difference between the cost of attendance at your child's college and your EFC is your child's financial need.

The federal government notifies you of the amount of your EFC in a document known as the Student Aid Report, or SAR. The SAR is also sent to the colleges that your child has applied to. When your child is accepted at a college, the financial aid administrator at that school attempts to create a financial aid package that will meet your child's financial need. The package will include various combinations of loans, grants, scholarships, and work-study programs, from both the government and the college. If appropriate, you will be given further information on where to apply for various loan programs.

If you're lucky, your child's financial aid package will meet all of his or her financial need. However, colleges aren't obligated to do so. If a college doesn't meet 100% of your child's financial need, you are responsible for meeting this shortfall. In some cases, you may be able to present special personal or financial circumstances to the financial aid administrator in an attempt to increase your child's aid award.

529 Plans Expanded

The new law expands the definition of 529 plan “qualified education expenses” to include K-12 tuition. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan for tuition expenses related to enrollment at a K-12 public, private, or religious school (excluding home schooling). Such withdrawals are now tax-free at the federal level.

The expansion of 529 plans may impact Coverdell Education Savings Accounts (ESAs). Coverdell ESAs let families save up to $2,000 per year for a child's K-12 or college expenses. Up until now, they were the only option for tax-advantaged K-12 savings. But now the use of Coverdell ESAs may decline as parents are likely to prefer the much higher lifetime contribution limits of 529 plans — generally $350,000 and up — over the $2,000 annual limit for Coverdell accounts. In addition, Coverdell ESA contributions can only be made for children under age 18.

Coverdell ESAs do have one important advantage over 529 plans, though: investment flexibility. Coverdell owners have a wide variety of options in terms of what investments they hold in their accounts, and may generally change investments as often as they wish. By contrast, 529 account owners can invest only in the investment portfolios offered by the plan, and they can change their existing plan investments only twice per year.

In addition, the new tax law allows 529 account owners to roll over (transfer) funds from a 529 account to an ABLE account without federal tax consequences if certain requirements are met. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used for a qualified expense.

Need more information?
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