One of the big personal finance topics of the last year has been the skyrocketing cost of higher education. It’s a big topic because we’re talking enormous sums of money. Students are graduating with an absurd level of student loan debt, very little in savings , and with the recent failure of a motion to extend low cost loans , costs are probably not coming back down anytime soon.
We reached out to some experts to try to gain greater insight into these issues. Today, we have the pleasure of speaking with Gary Hoover, Professor of Economics/Assistant Dean of Faculty and Graduate Student Development, Ph. D. at the University of Alabama. He’s the William White McDonald Family Distinguished Faculty Fellow and has published papers in the American Economic Review P&P, Southern Economic Journal, Public Choice, Journal of Economic Literature, International Tax and Public Finance, Applied Economics, and the European Journal of Political Economy. We reached out to him to get a better idea of what parents can do to help their kids save for college.
Q: Once a child gets accepted into college, the thought of paying for it can be frightening. What can parents do beforehand to help their chances at getting financial assistance?
A: Parents should be willing and able to wade through a mountain of paperwork. In the end, it might not help but has to be attempted. Certain types of funds are available until the source is extinguished. In which case, it is best to get all necessary forms in early. These will definitely include income statements. Making direct contact with personnel in the financial aid office is always a good idea. You cannot address an issue that you are not aware of and who better to know the ins and outs of financial aid better than people working in the area?
Q: How best can a prospective student contribute to their college savings plan?
A: The best thing that a student can do to help with college costs is to get good grades and be an engaged and active high school student. When academic scholarships are available, there is no reason that the decision of administrators should be an easy one. By getting good grades and being actively engaged in high school activities, students make themselves more attractive for partial or full scholarships. If there are more students than money, good. Make administrators do their jobs. However, if grades are set and no scholarships are coming, savings habits (which will last a life-time) can be set by contributing monies from after-school or summer jobs.
Q: Agree or disagree: 529 college savings plans are the way to go.
A: I mostly agree but not entirely. A 529 plan  offers parents great advantages in that they can be used nationwide. In fact, you need not be in the state you invest your funds in and send your child to school at an entirely different state. Given that these plans are typically either something like an IRA or 401k (which can go up or down in value) or a prepaid plan, I would probably think the latter is a better option than the former. However, my hesitancy to fully endorse these plans is because all plans are not created equally. Some are well managed while others are facing difficulty. As a result, parents need to do their homework and investigate their plan.
Q: Are parents eligible for any college-savings tax deductions?
A: There actually are. The details are complicated to explain but the tax benefits vary if the funds are kept in certain Education Savings Bonds  or the various state 529 plans. Special attention should be paid to maximum contribution limits which allow initial contributions to be larger. In addition, parents should be aware that funds for only “qualified” education expenses can be withdrawn without paying taxes but that varies also.
Q: Bachelor’s degrees are quickly becoming a baseline necessity and not a perk; should parents include post-graduate education costs into their savings plan?
A: No. Good performance in undergraduate learning can help to defray costs of advanced degrees. By helping to pay for an undergraduate degree, parents have allowed their children time to concentrate and hopefully receive grades that will allow them to receive advanced degrees at reduced or no costs.
Over the next two days, we’ll bring you more of Dr. Hoover’s answers along with another expert we spoke to, Professor Warren Smith of Palm Beach State College.