Education and career training is one of the most valuable investments you can make for your children’s future. An education beyond a high school diploma will increase your child’s chances of solidifying a career and having an improved lifestyle. Being knowledgeable about the varying types of education available and the strategies that make affording college easier, will allow parents to learn how to better finance this goal. College costs have been on a steady incline for almost two decades. According to FinAid, education outlays have increased at about twice the rate of inflation. These expenses are almost certain to continue to increase.
As a parent, you will have conflicting demands in financing your family’s chosen lifestyle and will need to set aside funds for education, retirement savings, and an emergency fund. Education planning should begin early as a part of an overall household budget plan. Ideally, your household budget should be in place prior to your child’s birth.
Saving for College
While it is never too late to start saving, the earlier you start saving for your child’s college education the more dedicated savings you will have available for those college-related expenses. Just as you contribute monthly to your 401(k) or ROTH IRA, you should do the same with your college savings. For instance, if you can only afford to start with a small amount each month, that is ok, but we would suggest that you increase the amount you save each month a little bit every year until you reach your monthly investment goal.
From an investment standpoint, approach savings to a child’s education with a “safety first” mentality. Unlike your retirement savings, college savings has a relatively short window of time to save (18 years) and the defined period of time (4 or 5 years) in which the funds will be utilized. Meaning, the closer you get to the distribution years, you should be more concerned with the preservation of your investment and less concerned with the return you receive on your investment.
Below are two ways to save for college:
Set Up a 529 College Savings Plan-
This is one of the most cost-effective areas in which to place savings for a college education. You should consider a monthly investment scheduled to go directly into the plan. Each 529 Plan has an owner (usually a parent or other relative) and a beneficiary (the child). Monies grow tax deferred, with distributions used for qualified college expenses are not taxed upon withdrawal. While 529 College Savings Plans are sponsored by State Governments, you are not restricted in which plan you can invest in, or where your child can attend college. Recently, some States have started offering plans that are designed to keep up with tuition increases. However, there are many restrictions on these types of 529 plans. You should consult your advisor to determine which 529 plan is right for you.
Save in a Taxable Investment Account-
Opening a savings account or investment account with money presumed to be dedicated to college expenses. This gives the most flexibility as the account would have no dedicated beneficiary and is not committed to college expenses until you actually use the funds.
Paying For College
Once your child is in his or her final high school years, it is important to Assess Your Financial Situation and Develop an Action Plan. To start, you will need to make an honest assessment of your child and the type of post-high school education that will suit his or her situation. You will also need to look at your earnings and savings to determine what you can realistically afford. A financial professional can help you make these decisions.
Once you know where you are at financially, you want to incorporate an Affordability Strategy into the College Search. It is important to have realistic expectations when the search for a college begins. Based on your savings and current income levels, parents should know if they can afford the most expensive private colleges or if a state school is the affordable solution. Better to have the hard conversation with your child before you start the college search than to have your teenager get accepted to his or her dream school and be disappointed when it is financially impossible for them to attend.
As part of the affordability strategy, your child could spend two years at a Community College. With lower tuition costs and the ability to transfer course credits to four-year institutions, you can either lower the overall cost of a bachelor’s degree or afford a degree from a more expensive college or university. Because community colleges do not require professors to do research or publish the focus is on teaching. Once you have determined the schools that are appropriate for your child, your next step should be actively pursuing External Scholarship Opportunities. Speaking to your child’s guidance counselor may lead you to local sources. You may also consider filling out a profile for your child at www.fastweb.com to see if he or she automatically qualifies for scholarships based on ethnic, racial, or cultural status.
If you are in a situation where you have not saved enough to fund a child’s college costs after tuition assistance you may need to consider Plan B. While not ideal, you do have the ability to take money from retirement accounts (401k plans, Traditional IRAs, and ROTH IRAs) if needed. For distributions from a 401k plan or a traditional IRA, any monies withdrawn are subject to regular income taxes, but not the 10% early distribution penalty tax. There could be a tax burden if monies are withdrawn from a ROTH IRA, depending on the circumstances. Please consult a tax professional before using monies from retirement accounts to pay for college costs.
Preparing for your child’s education is a process that will ideally start when he or she is born and concludes with a graduation ceremony. There are a number of saving options, including 529 College Savings Accounts and simply saving in an Investment Account. No matter the option you pursue, it is important to start saving early and on a regular schedule.
At Magellan Financial, we have the tools to help you with any educational savings questions you may have. To schedule a consultation or to learn more about how Magellan Financial can help, please call us at 610-437-5650 or email us at Jon.Soden@WFAFiNet.com.