FIN 350 Module 4 Education Planning Assignment Example

Education Funding Analysis for Two Children

[Student Name]

Southern New Hampshire University

FIN 350: Advanced Personal Financial Planning

Module Four Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Education Funding Analysis for Two Children

Introduction

Hannah and Dario Kessler, the composite Omaha couple from Milestone One, want to pay for four years at a Nebraska public university for each of their children, Mia, 9, and Leo, 6. They have $14,000 in Mia's 529 plan and $8,000 in Leo's and contribute $250 a month in total. Milestone One found that the family has only about $350 a month of free cash flow and a savings rate below benchmark. This paper projects college costs, calculates the saving required to meet the goal in full, compares the accounts available and recommends a realistic target that leaves room for retirement.

Assumptions

Planning assumptions

Projected Costs

Costs grow 5 percent a year until each year of attendance. Mia's first year, nine years away, will cost $28,000 x 1.05 to the ninth power, about $43,400.

Projected cost of attendance in future dollars

Required Saving

Because the four payments are spread over four years and the account keeps earning while Mia is in school, the amount needed on her first day of college is the present value of the four costs at 6 percent: $43,437 + $45,609 / 1.06 + $47,890 / 1.06 squared + $50,284 / 1.06 cubed, or about $171,300.

Her existing $14,000 will grow over nine years to $14,000 x 1.06 to the ninth power, about $23,650. The gap is therefore about $147,650. The annual saving that grows to that amount in nine years at 6 percent is the gap times 0.06 divided by (1.06 to the ninth power minus 1), about $12,850 a year or $1,071 a month.

Saving required to fully fund both children

Full funding would require about $1,971 a month, nearly eight times the family's current $250 and almost six times its free cash flow. That is not realistic without cutting retirement saving, which Milestone One already found to be too low.

Comparing the Accounts

Education savings vehicles for the Kesslers

The 529 plan is clearly best for this family. The Coverdell is closed to them by income, a custodial account would hurt aid and hand control to an 18-year-old, and a Roth IRA is better kept for retirement. Nebraska's deduction of up to $10,000 a year saves the Kesslers about 5.2 percent of each dollar contributed at the state's 2025 top rate. Dynarski (2004) found that the tax benefits of 529 and Coverdell accounts flow mostly to higher-income families who would likely have saved anyway, which describes the Kesslers; for them, the plan's value lies in tax-free growth and the state deduction.

Aid and Credits

With income near $263,000, the Kesslers' Student Aid Index on the FAFSA will be high, so need-based federal grants are unlikely. The American Opportunity Tax Credit, worth up to $2,500 a year per student, phases out completely for married couples with income above $180,000, so they would not qualify unless their income falls. Merit scholarships remain possible, and Nebraska public universities offer them widely.

Recommendation

The Kesslers should aim to fund about 60 percent of projected costs through 529 plans, which requires about $1,080 a month in total, or $575 for Mia and $510 for Leo. They can reach that level in stages: raise contributions to $500 a month now, after the credit card is paid off, then increase by about $150 a month each year as raises and the end of the truck loan free cash. Lusardi and Mitchell (2014) review evidence that households who make concrete plans accumulate considerably more wealth than similar households who do not, and a written schedule of increases is exactly that kind of plan. Thaler and Benartzi (2004) showed that committing in advance to raise savings with future pay increases helps people save more, because the increase never feels like a cut. The remaining 40 percent can come from scholarships, the children's summer earnings, cash flow during the college years and modest federal student loans. The 529 accounts should stay in age-based portfolios that shift toward bonds as each child nears 18.

If the Plan Falls Short

If returns or contributions come in below plan, the family has several levers before borrowing heavily. Each child can start at the University of Nebraska at Omaha, closer to home, and live with the family for the first two years, which would cut housing and food costs by roughly a third. Federal Direct loans in the student's name carry fixed rates and income-driven repayment, a safer form of debt than parent loans. And the 529 balances can be reallocated between siblings if one child receives a large scholarship. The plan will be reviewed each year against these projections.

Conclusion

Four years at a Nebraska public university will cost about $404,000 for the two children in future dollars. Funding all of it would take nearly $2,000 a month, more than the Kesslers can save while also fixing their retirement shortfall. A staged plan to reach 60 percent through 529 plans, with the state deduction and planned increases, protects both goals.

References

Dynarski, S. (2004). Who benefits from the education saving incentives? Income, educational expectations, and the value of the 529 and Coverdell (NBER Working Paper No. 10470). National Bureau of Economic Research. https://doi.org/10.3386/w10470

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44. https://doi.org/10.1257/jel.52.1.5

Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187. https://doi.org/10.1086/380085