Saving for college? Consider these 2 things
If you’re like most parents, you’ve spent more than a few sleepless nights worrying about your child’s future. After general happiness and wellness, one major concern often tops our minds: How to start saving for college?
Educating yourself on available options and setting realistic goals can help ease some of the stress associated with this step in your life’s journeys. Start by answering these two questions:
How much can I comfortably save without sacrificing my own retirement?
To answer that question, determine what you have available after your monthly budget and retirement savings have been allocated. College loans are readily available and typically offer low interest rates. There are no retirement loans. Take the “put your own mask on first” approach and prioritize retirement savings over saving for your child’s college expenses. You can always contribute later by helping to pay off student loans.
What type of higher education are you prepared to support?
Public or private? Two-year college or master’s degree? Tuition fees vary wildly based on school type and degree. Decide what level of education you are prepared to support and set a savings goal based on that decision. Be transparent with your child. If you are saving to pay for a four-year degree at a public university, but your child wants to pursue a master’s degree at an out-of-state private school, hold your child accountable for their decision and maintain your savings limit.
After you’ve identified a comfortable monthly savings amount and tangible total savings goal, here are a few options to set that money aside and make it work for you:
- 529 Plan. These are education savings plans that provide tax-free earnings over time. Money withdrawn to pay for qualified education expenses is not subject to state or federal taxes. Withdrawals for any use other than education are subject to penalties and taxes. The longer your money is invested, the greater the benefit, so this approach is best if you are starting to save while your child is young. 529 plans can be a useful vehicle for family members seeking to contribute to a child’s education. Grandparents can start a 529 plan after their grandchild’s birth, for example. Financial gifts received throughout the child’s early years can also be contributed to 529 plans to build their education learning savings.
- Custodial Investment Account. These are financial accounts held in a child’s name but controlled by the parents until your child turns the age of majority determined by your state. Money contributed to custodial investment accounts is invested similarly to 529 plans. However, while 529 plan funds must be used for education expenses, custodial investment account funds can be withdrawn for any purpose but are subject to taxes. If you are unsure about your child’s education plans or wish to provide them greater flexibility, a custodial investment account may be the best savings vehicle for you.
Ready to start saving? Still not sure which options are right for your family? Financial advisors can provide additional guidance in determining which path is right for your family.