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Top 5 College Savings Tips
5 Tips for College Savings Success
Saving up for your children’s college education might seem like a Herculean task, but if you start early and stick to a solid game plan, you can give your children an incredible gift of higher education. Here are some thoughts and ideas that may help you get started.
1) Start Now: The Benefits of Early Financial Planning
It’s never too early to start saving for college, and also never too late. The earlier you start, the more time you have to grow your money thanks to compound interest. Here’s an example for illustrative purposes only. Saving $200 per month starting at birth, with a moderate 6% rate of return, will cover almost $90,000 of your child’s college education. You’d have to save about $500 monthly if you started at age 10 to save the same amount.
2) Make a Plan: Your Roadmap to Success
While you can always change your approach, think about what you’re trying to achieve and then build a plan you can maintain over time. Here are some questions to consider:
- Commitment Level: Do you want to cover the total cost of college or just a portion? Your children will be thankful regardless of what you decide!
- Covered Expenses: Will you pay a set amount, a percentage of costs, or specific costs like tuition, room and board, or additional expenses?
- Savings Goals: How much can you save, and at what frequency? You can set aside a lump sum today, or you may decide to contribute monthly through automatic deductions.
3) Explore Your Financial Options: Finding the Right Fit
There are more ways to save for college than you might think. Here are a few more (and less) common approaches. These are general summaries, and all have a lot of rules and requirements. Please get in touch with us if you’d like to learn more.
- 529 Plans: These state-sponsored plans offer tax-free growth and withdrawals for qualified education expenses. They’re popular, but not the only option.
- Coverdell ESA: While income and contribution limits exist, these accounts tend to have more investment options and can be used to pay K-12 or college expenses.
- Permanent Life Insurance: College expenses may be covered by a loan against the policy or, if disaster strikes, the death benefit.
- Brokerage Accounts: Your broker will thank you, but fees, taxable gains, and financial aid impacts may make other options a better choice.
- Uniform Gifts to Minors Accounts: UGMA accounts tend to offer more flexibility in their use, but may impact eligibility for financial aid.
- Hire Your Children: Certain business owners can pay wages to their children, decreasing tax liability for the business and child. A little hard work never hurt anyone!
4) Navigate Student Loan Forgiveness: A Potential Path to Relief
Student loan forgiveness programs are receiving headline attention from the media, politicians, and courts. While your children may have loan forgiveness opportunities in the future, treat these programs as a potential windfall rather than your primary savings plan.
5) Balance Your Priorities: College Savings vs. Retirement Planning
Financial advisors will often prioritize saving for retirement over college. It’s easier to find loans for college, but you can’t borrow for retirement. Think about contributing to your company 401K or an IRA first, and work on college savings. Here’s a tip: some retirement accounts allow you to withdraw money penalty-free to pay for qualified education expenses. That gives you some added flexibility.
Seek Professional Guidance: The Value of an Advisor
With so many options available for college savings, consider sitting down with a financial advisor (like us) to review your financial situation, set some goals, and build a solid plan to save for your children’s college education and your own retirement. We can also look at different scenarios, like one of your children deciding to skip college and start working. Please click here to set up a no-obligation introductory meeting. We love sharing ideas!
