Moderator’s Introduction, Douglas R. Knight
The goal of this workshop is to discuss ways of helping grandchildren invest for college and eventual retirement. Grandparents have the time, experience, and resources to help those investments.
My role as moderator is to introduce today’s topics. Mr. Eric J. Robbins will then describe ways of investing in your grandchildren’s future. Eric is a senior investment advisor at Buckeye Wealth Management with over 30 years of experience in the financial services industry. Finally, Mr. Jefferson R. Blackburn-Smith will suggest ways of preparing grandchildren for college. Jefferson is Otterbein University’s Vice President for Enrollment Management.
The reinvestment of stock market returns is the preferred method of saving for college and retirement (chart 1). “College” is any certified program of higher education at trade school, the 2-year Associates degree, the 4-year Bachelors degree, graduate school, or professional school. Family savings, student scholarships, and financial aid are principal sources of funding to pay the cost of college. There are also ways of reducing the cost of college. Paying for college deserves early planning.
Chart 2 shows 3 goals for gradually improving children’s knowledge of personal finance.
- The first goal, financial training, is an important program which is best taught at home by parents. The topic of money for pre-school children is an ideal place to start. Proper management of money will become the child’s most important skill for personal finance and college preparation.
- The second goal, “college” graduation, is headed for success when parents start saving for college early-and-often in a 529 plan. Grandparents can contribute funds to the 529 and also help nurture the lives of their grandchildren. Grandchildren thrive on dreams, experiences, and skills to help prepare for college. Well prepared students are those most likely to graduate from college with a useful education. “College prep” refers to the high school student’s tasks of choosing colleges, obtaining scholarships, and reducing the costs of college; guidance counselors and librarians are excellent resources. Negotiation is the process of comparing college acceptance letters and seeking the best financial terms of paying for college. Excessive student loans can be a disturbing financial burden after graduation.
- The third goal, secure retirement, begins when grandchildren start saving for expensive things; those things become more expensive as a child’s interest shifts from toys to stylish clothes, electronic devices, and cars. Bank accounts offer security to a child’s savings. A grandparent can help grandchildren buy a stock and then periodically review its performance; it’s an excellent introduction to the world of finance. Jobs help grandchildren form entrepreneurial ideas. The taxable earnings can be deposited in a custodial Roth retirement account. Grandchildren need to be encouraged to save taxable earnings in the Roth account as a matter of habit. All children need safety lessons to avoid truancy, cyber attacks, gambling, credit card debt, and other risks to their wealth and health.
After college, young adults should enter the workforce even if their first job is not a ‘dream job’. Job success will enhance their future workforce mobility.
Investing for Your Grandchild’s Future. It’s Never Too Early to Start, Eric J. Robbins
The key points of my talk are:
- college is an expensive investment that often incurs debt
- grandparents’ financial assets are not detrimental to student eligibility for federal financial aid
- families have many ways of saving for college; among them are several tax-advantaged savings programs
- parents and grandparents should avoid making 4 big mistakes when paying for college
- careful planning will reduce expensive mistakes
The average cost of college tuition and fees in 2017-18 varied from $9,970 [for in-state public schools] to $25,620 [for out-of-state public schools] and $34,740 [for private colleges]. To cover these costs, my recommendation is to start a college payment plan early! Otherwise, a large debt from student loans could cause significant financial distress after graduation from college. The average cost of student-loan debt is $351/month (chart 3).
In general, students use loans to pay for 19% of college costs and parents borrow an additional 8%. Grandparents typically pay no more than 4% of college costs (chart 4)
College students are required to submit a FAFSA form (chart 5) to the college admissions office when applying for federal financial aid. High-income families with large savings accounts (“assets”) receive less federal financial aid than low-income families with small accounts. For a given amount of family assets, larger portions of student savings attract less federal financial aid. Grandparent-owned assets are invisible and have no effect on federal financial aid (chart 5).
Families have many ways of saving for college (chart 6)
Qualifed series EE savings bond, 529 savings plans, Coverdell IRAs, and Roth IRAs are protected from federal taxation of investment returns. Chart 7 offers a useful comparison of these tax-advantaged plans with taxable custodial accounts.
Several comments about chart 7: Investment returns are not taxed except in the UGMA/UTMA accounts; annual income limits may restrict participation in the Roth and Coverdell accounts; contribution limits to all accounts are regulated by the government except for the UGMA/UTMA; untaxed returns can be withdrawn for qualified educational expenses (UGMA/UTMA returns are always taxable); account owners are allowed to change the student beneficiary in all but the UGMA/UTMA accounts; account owners or custodians are generally allowed to control the account with some exceptions; non-FDIC investments are not guaranteed (but why invest in a low-return FDIC account for long-term growth of savings?)
The reason for having a college savings plan is avoid mistakes that lead to unnecessary personal losses. The biggest mistakes that parents and grandparents make are shown in charts 8-11.
If a parent waits 5 years before starting to invest $200/month, the $17,380 opportunity-cost of waiting to invest would decrease the final savings balance to $13,680 instead of $30,998 (chart 9). If the parent initially invested $10,000 and then waited 5 years before investing $200/month, an opportunity cost of $29,885 would reduce the final balance to $64,906 instead of $94,791.
Additional mistakes are: failing to plan for college; allocating college savings and other financial assets to the student instead of the parent; and, no planning for possible investment losses.
Families can reduce financial mistakes for college by gathering useful information (chart 12), selecting a suitable investment return (chart 13), and seeking alternative sources of funding (chart 14).
Helping Grandchildren Invest: Strategies for College, Jefferson R. Blackburn-Smith
The agenda for my talk:
- some truths about college
- savings strategies
- controlling cost
Many families aren’t prepared for college. Here are four ‘truths’ that college-student families need to know:
Truth #1: College is worth the effort of careful planning (chart 17). Grandparents can help by promoting the opportunities of a college education.
Truth #2: College is expensive but few students pay the full price (chart 18). For example, students can seek grants and scholarships that reduce their payments.
Truth #3: The student debt crisis needn’t be as bad as reported by the media (chart 19). Low-income students tend to borrow more carefully, high-income students less carefully.
Families can shop for government and private student loans with the best interest rates and repayment plans. College graduates might choose to participate in debt-forgiveness programs by seeking employment in certain public service programs.
Truth #4: Cost, quality, and educational outcomes are important factors to consider in selecting a college (chart 20).
One way of paying for college is to distribute the expenses equally among 3 financial accounts (chart 21).
Among ways of paying for college, an educational savings account works best when started by an adult early in the grandchild’s life. Grandparents can encourage their family to open a savings account and then make contributions to that account (chart 22).
There are many advantages to using a 529 college savings account owned by parents (chart 23).
In comparison, student-owned savings accounts may be taxable and could reduce the student’s eligibility for financial aid (chart 24).
Student performance and lifestyle have a signficant impact on the cost of college. Roughly half of Ohio’s 4-year college students graduate on time, which means that the other half are either dropping out or paying much more to graduate. In chart 25, “Lifestyle” borrowing refers to students paying for unnecessary college expenses such as extravagant vacations.
- Grandparents have the time, experience, and resources to help prepare grandchildren for college and retirement.
- Continual reinvestment of stock market returns is recommended for college and retirement savings plans that are started early in the grandchild’s life.
- Protect college and retirement savings in a tax-advantaged education account (e.g., 529 plan) and retirement account (e.g., Roth IRA).
- Help grandchildren acquire the lifetime habit of saving for retirement
- Help grandchildren channel their dreams and experiences into goals for careers and adult life; college could help them achieve those goals.
- Many families are unprepared for college. Early planning and careful preparation will reduce the cost of graduating from college.
- Minimize student-loan debt by starting a 529 plan early. Other ways of minimizing student debt include grants & scholarships, work-study programs, reduced college expenses, and loan forgiveness programs.
[additional references are listed in the LITERATURE page of this blog]
Copyright © 2018 Douglas R. Knight, Eric J. Robbins, and Jefferson R. Blackburn-Smith