I spend most of my time as a Financial Advisor telling my clients not to try to time the market. Study after study shows that no advisor can consistently time the market, as you have to be right not once, but twice. First, you have to guess when the market will begin to tank, sell it all, then know when to jump back in after the market has bottomed out and is ready to take off again. But there is one exception to when I can confidently say that you should and could time the market, and that is with respect to your contribution to Pennsylvania 529 Guaranteed Savings Plan (GSP).
Pennsylvania has two different types of 529 plans. Investing in the PA 529 Investment Plan (IP) is similar to investing in mutual funds. Your contributions can be invested in funds that are age-based, or you can invest in various funds that invest in stocks, bonds, money market or a combination.
The second 529 option in Pennsylvania is the GSP. The GSP acts as a prepaid tuition plan, so you can essentially pay for a semester of college today, and your 529 account beneficiary can use that prepaid semester anytime in the future. In effect, GSP funds will grow at the rate of increase of college tuition, which have risen between 3% and 6% per year (depending on the type or level of school) in the 5 years ended in 2015-2016.
On September 1 of each year, Pennsylvania applies the tuition “inflation” to the balances in the GSP accounts. That means a full year’s worth of interest is credited to those accounts. Therefore, if you planned to make lump contribution to a GSP during 2017, you want to make sure that contribution is in place by late August. A contribution made on Labor Day will have to wait an entire year to earn “tuition inflation”, but one made a week earlier earns a full year’s worth.
While you are contributing to you PA 529, please sign up for the Sage Scholars program. This program functions as a free “frequent flyer” points (dollars) that you can use at certain private colleges. There is no cost to join. Since the PA 529 program is a participant in the Sage Scholars program, each quarter you earn Tuition Rewards equal to 2.5% of the value of your PA 529 account – adding up to approximately 10% per year. The earlier you sign up, the more points in Tuition Rewards you can rack up before college.
If you end up attending one of the nearly 400 colleges that participate in the Sage Scholars program, you can use the Tuition Rewards to offset the tuition there dollar for dollar. Tuition Rewards can pay for up to 25% of the cost of tuition (based on freshman year tuition), spread equally over four or five years.
Why do colleges participate in the Sage Scholars program? Many of these schools are smaller and lesser-known private schools that are competing to attract talented students, and this is one way they can differentiate themselves. If your oldest student chooses not to attend a Sage Scholar school, the points can be transferred to a younger sibling your grandchildren, nieces or nephews. What do you have to lose?
Cost of Attendance (COA) – Includes tuition and fees, room and board, books and supplies.
Merit Scholarship – Grants offered by some (but not all) schools based on student’s incoming grades and/or standardized test scores. Awarded to students in the top ~25% of incoming class.
Needs-Based Grants – Grants (not loans or work study) awarded based on financial need.
Private Scholarships – Scholarship awards that come from sources other than the college.
Total 529 Savings Plan – 529 savings in the parent’s or student’s names only.
Parent Pledged Assets – Any non-529 assets (e.g., savings, investments) that parents have set aside for the student for college.
Parent Pledged Monthly Cash Flow – Annualized amount of monthly cash flow that parents will divert to fund college.
American Opportunity Tax Credit – Maximum annual $2,500 tax credit per student often claimed on parent’s tax return. Income limits apply.
Student Pledged Assets – Student’s savings and/or investments that will go towards college
Student Pledged Monthly Cash Flow – Annualized amounts typically from work study or part-time jobs.
Grandparent and Other help – Amounts paid from 529s, savings, investments, etc of non-immediate family members including grandparents, uncles, aunts, and possibly ex-spouses.
Pre-Approval Amount – Total funds for college other than grants and loans
Funding Gap – Net cost of college less Pre-Approval amount. Typically equal to the total amount of loans that will be needed.
Loans – Federal Direct Student Loans are based on FAFSA filings and awarded through the school. Federal Direct Parent PLUS loans are taken out by the parents. Perkins Loans program has been discontinued as of 2018.
Remaining Funding Gap – Difference between Net Cost and all sources of funding (incl loans).
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