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Fitting College Funding Strategies into your Overall Picture
By David Chazin
As the spring rolls in, so do college acceptances and the important decisions that follow. For many Chevron employees, this includes how to pay for college, which will be one of the largest expenses in your lifetime.
However, there are good reasons for believing that paying for your child’s/children’s college education should actually be placed lower on the totem pole of financial priorities. For one, there is the availability of tools to pay for college, such as financial aid, student loans, grants and other programs where loans are forgiven in exchange for public service in low-income communities. Also, the government provides accounts where you can invest for your college on a tax-advantaged basis such as 529’s, Coverdell accounts and UTMA’s, which you should consider. But, most critically, focusing too much on college savings can jeopardize a family’s overall financial planning strategy.
First Things First
Some family financial needs may be a good thing, like college for children, or they can be more sobering, like long-term care costs for the parents, or medical expenses for grandparents. Devoting too many resources to college savings can cut into preparing for inevitabilities such as retirement, which—unlike financing college—can’t be funded by loans.
That said, the price of college isn’t the same as when you went. Costs have escalated to new highs. For example, even if one of your children or grandchildren attend nearby California State University, East Bay, and live at home, you could still incur nearly $16,000 per year in estimated expenses, according to the
- Establish an emergency fund. It’s critical to establish an emergency fund with at least three to six months worth of living expenses. This is a key building block for meeting a family’s basic financial needs. After all, what if you have a job change or you get laid off? If you don’t have six months worth of expenses to fall back on, you can’t go into that 529 account and take money out without paying a penalty and taxes.
- Fully fund Chevron-sponsored retirement plans. A major mistake many people make is reducing contributions to their Chevron-sponsored retirement plan in favor of investments toward a child’s education. Instead, the priority should be in making as large a contribution as possible into your 401(k) plan and any plan your spouse has. Doing so not only enables you to take advantage of Chevron’s match program, it may also provide potentially significant tax advantages.
- Take care of insurance needs. Too many parents make the mistake of ratcheting back on life insurance, and disability income insurance in order to save for a child’s education. But, if something bad should happen, both college and a family’s most pressing needs may be in jeopardy. If the primary breadwinner isn’t working and doesn’t have income coming in for a long period of time then, in many cases, paying for college is out of the question. Chevron employees should save for their children’s or grandchildren’s college while simultaneously retaining insurance coverage, and while Chevron does provide some coverage, you may want to investigate your options to purchase additional coverage.
- Don’t forget IRA’s. It’s crucial to continue funding both your Traditional and Roth IRA’s as much as possible if you qualify under income limitations. Roth IRA’s are particularly good in case parents want to use some portion of those assets for college, because in some circumstances, after five years the contributions into a Roth IRA can be withdrawn income tax and penalty-free. Roth IRA earnings taken prior to age 59 ½ normally are subject to a 10% federal tax penalty and possibly state income taxes.
While financing all or part of your child’s college education is a worthy goal, it’s critical to keep your family’s overall financial picture in mind when making financial planning decisions. And for those of you trying to figure out which college your child should attend, congratulations on the acceptance letters.
I’d be happy to sit down with you and discuss some ways to fit college funding into your overall financial picture. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.
We’d also like to congratulate you on receiving your CIP for this year. We understand last year was a great year at Chevron. Hopefully, your CIP reflects that.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.
 The California State University 2010-2011 Cost of Attendance, July 1, 2010. The California State University