College Savings Solutions

Small business owners and executives must plan carefully for their children’s educations. 

By George N. Saliba, Managing Editor On Jan 26, 2015

Expensive property taxes, saving for retirement, credit card bills and car payments can burden even well-to-do New Jerseyans, and saving for children’s college educations is an additional pressure that often doesn’t receive the attention and proper planning it deserves. Of course, early saving – sometimes even before a child is born – can maximize the power of compounding interest, and a host of other strategies can help pay for college, even if the proverbial piggy bank is not as full as one had hoped.

Theodore “Ted” S. Byer, member of the firm, Smolin Lupin, says, “The biggest concern [parents have] is: Will they have enough for college? Also, I can tell you that while they save for a tuition number, they don’t often include all the sundry costs that are involved in a college education, such as books, computers, spending on the weekends and travel home – assuming the child is living away at school.

“The tuition is the easy part to save for, but parents find themselves a little shell shocked with the other assorted costs, because they didn’t prepare for them.

“[Overall,] people are very concerned about saving for college, saving for retirement and living their lifestyles. In addition, many people who have college-aged children are in the sandwich generation, when they may have to care for elderly parents, or an infirmed parent. It absolutely creates a lot of stress for the average person,” Byer adds.

Saving Methodologies

Investing in a 529 plan is a clear, first step toward saving for college, since these tax-free havens are designed with the sole purpose of financing education. That said, experts advise that 529 plans vary regarding fees and other aspects, and the investor should carefully examine a prospective 529 plan: Might New Jersey’s NJBEST plan serve as an appropriate choice? More broadly, how does a particular plan work? A financial planner can guide parents through these endeavors.

Ted Nappi, a partner at the CPA firm of WithumSmith+Brown, explains, “Whether it is 529 plans, or you are investing through regular savings, be sure to evaluate your investments, because the fees on a lot of mutual funds and some of the 529 plans can be high. Locating the ones that have the better returns and lower fees is certainly going to add to your returns.”

Meanwhile, Roy Williams, CEO of Flemington-based Prestige Wealth Management Group, advises, “If grandparents are going to start a 529 plan, they should not put it in a child’s name. If they put it in a child’s name and the parents get divorced, it’s not their money; it is a marital asset. Half the money that’s in the 529 plan will go to the other spouse.” Simply put, grandparents should establish 529 plans in their own names.

While saving for college is critical, it should not be done at the expense of retirement planning. Robert D. Traitz, certified financial planner and certified college planning specialist, American Education Funding, LLC, explains, “What I will say is every 401(k) plan has particular details. What it allows – and doesn’t allow – needs to be reviewed, carefully, in your company’s 401(k) plan. Could it be a source [for college funding]? Yes. Would you be robbing from Peter to pay Paul? Yes. If you are 45 or 50 years old, and paying college costs by depleting your retirement account, and you want to retire in 10 or 15 years, you are kind of self-destructing.”

Smolin Lupin’s Byer echoes these sentiments: “The one thing I always tell my clients is not to sacrifice their retirements for the sake of college education. When push comes to shove, you can always borrow for college; you cannot borrow for your retirement. I tell them first and foremost: Before you start saving for college, make sure you are doing your 401(k)s and everything that you are supposed to be doing, for yourself. Then, save for college, and if you find that there are shortfalls, there are ways to deal with them. It may be through scholarships, government loans, private loans, etc. When you are 65 or 66, and getting ready to retire, the government will not loan you money to ‘maintain your lifestyle.’ Retirement must come first.”

Scholarships and Financial Aid

From a financial aid perspective, most readers of New Jersey Business may not qualify for need-based financial aid. For example, the Expected Family Contribution (EFC) does not take into account New Jersey’s high cost of living and the fact that much of a family’s salary here may be diverted to property taxes and other high-cost arenas.

That said, there are myriad ways for obtaining money for college, as American Education Funding’s Traitz explains. “Inevitably, someone will say, ‘I earn $250,000 a year and I have got some investments, and I probably shouldn’t waste my time [with financial aid].’ My argument is that everybody needs to file the financial aid forms.

“The elite colleges: The Harvards, Princetons, Yales, Dukes, Emory, Rice – they have no problem attracting the high-grade-point-average kids, and the high SAT and ACT-scoring kids. As a matter of fact, they turn them down regularly. For example, a kid with a 4.0 GPA, who is valedictorian may hear: ‘Sorry, no room for you at Harvard.’ The demand at Harvard is huge. Harvard only gives money away to families in need: You have to show need. But, they don’t give anything for merit.

“On the other hand, there are middle-tier colleges and universities that want to become the Harvards, the Yales, Princetons and Rices. They are looking to do better, and, ultimately, build to that higher level. How do they do that? They dig into their pockets and pay up for kids who are better than average.

“[For a good student, they might say,] ‘Congratulations, you are accepted, and in appreciation for what you have accomplished, we are going to give you $10,000 a year, if you come to our school: $10,000 a year, every year for four years, if you maintain a B grade point average or better, and remain a full-time student.’

“There’s that $250,000 family that earned their money. They started by priming the pump with $10,000 a year. Now, the question is: Why should they fill out the Free Application for Federal Student Aid (FAFSA)? Well, the FAFSA allows you to list 10 colleges and universities that will receive this student aid report.

“For example, Marist puts $10,000 on the table, and says, ‘By the way, make sure you fill out the financial aid form – we might be able to help you out, more.’

“Why is Marist asking for this? They want to know what their competition is. They want that kid. That’s why they accepted him. That’s why they put the $10,000 on the table. Now, they want to know: What else must they to do to get that kid? They say, ‘Wait a minute, we just found out this kid applied to Rutgers at $26,000 a year. Why wouldn’t he go to Rutgers at $26,000, instead of coming to us and paying $40,000? We just got the FAFSA; this family can afford to pay it. Overall, we want this kid. Let’s sweeten the offer. We have got to compete.’

Traitz concludes, “It is not so much the kids competing to get into these schools; it is more the schools competing to get the bright kids. When I talk to a family who has come up to me after I have spoken [before a group], the first question I pin them with is: ‘What has your kid accomplished?’ ‘What is the class rank?’ ‘What kind of GPA?’ ‘Has he/she taken AP classes?’ Even a kid with a 2.5 GPA can get merit aid, applying to the right school.”

Overall, scholarships, grants and potential loans are available and can be located with diligent research. For example, FastWeb.com is essentially a scholarship website. A user can enter criteria (different ethnic issues, etc.) and then locate appropriate scholarships.

Graduate School

Nearly everyone is aware that in today’s global economy and highly-competitive labor market, a graduate degree is the “new credential” for obtaining a quality job. How do parents approach this scenario? Many are shifting the burden of graduate school funding to their children, and requiring them to obtain education loans. While some parents assist with paying these loans at a later date, others do not.

Smolin Lupin’s Byer says, “I find a mindset with a lot of parents is: ‘I paid for the first four years. You may have to get some student loans and pay them back while you are working, with all the additional money that you are going to earn having this advanced degree.’”

Byer adds, “But, certainly if the parent has the means [to pay for graduate school], that’s wonderful – they have saved even more than they needed. … I don’t see that often, but if it happens, it’s wonderful.”

Conclusion

While lifetime earning potentials can be dramatically affected if a college degree is not obtained, there are many ways to “make a college degree happen.” Of note, New Jersey’s county colleges have greatly increased their prowess in recent years, and highly talented students often attend them at a fraction of four-year school costs. After two years, these students can then transfer to four-year schools and obtain baccalaureate degrees. In broad terms, education options are practically endless, and intelligent strategies combined with perseverance typically results in success.

 

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