College savings dilemma

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Profile:Chris and Mike Roe
The problem:
The Roes have two college-bound teenagers but haven’t started saving.
The plan:
Open 529 plans for each child and fund them aggressively.
Chris and Mike Roe

Mike and Chris Roe, 43 and 46, from rural Kansas, have two children, a son, 15, and a daughter, aged 12. Mike runs his own small business and Chris is employed by the local school system. Mike has worked hard to make his business a success and is now thinking more about the future.

One of the Roes’ primary goals is to have their children attend college. This will take some planning as they only have three years until the first one will enter. They are also faced with the reality of two children in higher-education institutions at the same time.

Mike and Chris want to know what it will take to help their children attend college and achieve some of their dreams.

   The problem

The Roes have a problem that is familiar to thousands of young couples throughout the United States. How do they start at a later date to work out a viable plan for their children’s higher education? They only have a limited amount of time before the first one will enter college.

Choose a college
One big variable in this equation is where the children want to go to college. In the Roes’ case they are planning for their children to attend Kansas State University either directly or after a two-year stint at local Pratt Community College. If their son starts at community college and then moves on to Kansas State, he will be able to live at home for the first two years, which will save additional expenses.

This will be a big advantage for the Roes. Like most of their other living expenses, the cost of a college education in Kansas is not very high by national standards. In fact, Kansas State has been noted as one of the great bargains in education in several different educational surveys. What the Roes need to come up with is the amount of money they need to have available to support their children in their college careers.

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This report was prepared by William Z. Suplee IV, CFA, CFP, ChFC.
Key issues
    Two teenagers expect to go to college but family hasn’t started saving.
    Need to figure out how much college will cost.
    Have saved for retirement and have emergency fund.
    Don’t want to wipe out retirement savings and emergency fund to pay for college.
Jump these money hurdles
  The problem

Qualify for financial aid
Like the great majority of young people entering college (more than 60 percent), the Roe children will be able to qualify for some type of financial aid. The next step is to calculate how much financial aid they can expect and how much they will be expected to pay themselves. The easy way to do this is to use a financial aid calculator.

There are many financial aid calculators available online. While various calculators use different methodologies and inputs, you can just pick one to get a general idea of the resources necessary for college. A rough idea of how much you will need to save is fine due to all the uncertainties about the data inputs. We used the Roes’ income, assets and expected college costs to plug into a calculator to arrive at our estimate. Mike and Chris’s expected family contribution, or EFC, for their two children will be in the range of $32,000 over a seven-year period.

Two points about this EFC should be discussed for planning purposes. The first is that the estimated college costs do not impact the EFC very much. The Roe children can look at much more expensive colleges, if they wish, and this will not make much difference to the expected family contribution. Higher college costs increase the amount of financial aid they are eligible to receive. Regardless of whether they will seek financial aid, they should fill out the Free Application for Federal Student Aid.

The second is that the family’s EFC might be higher, or lower, than we calculated. The uncertainty comes because a large part of the assets used for the calculation depends upon the value of Mike’s closely held business, which is hard to pin down. Because their EFC can come from a combination of personal assets, current income or borrowing, the value of their assets will have a big impact on their contribution.

Tap retirement savings?
While the Roes have managed to save more than $50,000 in cash and investments, not including retirement accounts, it would take a large amount of these funds to fulfill their obligation. As an alternative, if needed, they should be able to borrow against either their two rental properties or Mike’s business. However, it would be more in keeping with their goals if they could have a plan to save enough money for education expenses without having to rely on these two options.

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Our plan for the Roes