Financial Planning For College: What You Should Know
Learn the Basics<br />No matter how you plan to pay for college, understanding common financial terms and concepts will help you make decisions that are right for you. <br />
Liquidity<br />is how easy it is for you to get money out of an account. Accounts with restrictions or penalties for getting your money are less “liquid” than those without.<br />What to Ask Yourself<br />What You Need to Know<br /><ul><li>How much money and how long do I have to commit?
Are there rules about if/when I can get my money out?
Can I afford the penalties in an emergency?</li></li></ul><li>Risk<br />is the chance that you could lose money.<br />What You Need to Know<br />What to Ask Yourself<br />All investments involve some risk, but some are more likely to lose money than others. Your financial institution can help you understand the levels of risk with different investments.<br /><ul><li>How much money can I afford to lose if the worst happens?
How much risk am I comfortable with?</li></li></ul><li>Keep in Mind . . . <br />Your financial institution could fail or go bankrupt. <br />Protect yourself from this type of risk by making sure your accounts are insured by any of these organizations:<br />FDIC (Federal Deposit Insurance Company)<br />NCUA (National Credit Union Administration)<br />SIPC (Securities Investor Protection Corporation)<br />
Interest/Returns<br />These terms refer to money that your account collects over time.<br />
Interest Rate/Rate of Return<br />refer to the percentage of your total balance that is expected (or guaranteed) to be “compounded” or added to your account in a specific time period. It may be expressed as:<br /><ul><li>“Annual Percentage Yield” or “APY” for a year’s time period.</li></ul>Once interest is compounded, you’ll earn interest on the new total. The more often interest is compounded, the quicker your money will grow.<br />
Inflation and Value<br />is how much prices tend to go up each year. Recently, the inflation rate has been about 2-4% per year.<br />What You Need to Know<br /><ul><li>If your account’s return rate is less than the inflation rate, your money will lose value. You will be able to buy less with it in the future than you can today.
If your account’s return rate is higher than the inflation rate, the value of your money will go up. You will be able to buy more in the future than you can today.</li></li></ul><li>Impact on Taxes<br />You will have to pay taxes on earnings from some accounts, but others can grow tax-free. Sometimes whether or not you pay taxes depends on how you use the money.<br />What You Need to Know<br />What to Ask Yourself<br />When earnings are taxed, they may be taxed as earnings of your child (which usually means lower taxes) or as your own earnings.<br />Will I have to pay taxes on the interest/returns on this account? If so, how will they be taxed?<br />
Impact on Financial Aid<br />Earnings from some accounts can affect financial aid eligibility. <br />What You Need to Know<br />What to Ask Yourself<br /><ul><li>Some account earnings count as “assets” (or items that are of value) on your FAFSA. The more assets you have, the less aid you’re likely to get.
Find out whether the account or its earnings count as your child’s assets or as yours. Children’s assets can decrease financial aid eligibility by the greatest amount.
Are the taxes and/or the potential decrease in financial aid made up for by a large enough return?</li></li></ul><li>Other Questions to Ask<br /><ul><li>Does this account have any fees?