SAVING FOR EDUCATION
A good college plan is a road map that can guide you through school to college, advise you and what to do, and track your progress throughout the process. It begins by creating a plan that defines your educational needs.
Are you planning to help your children, grandchildren or another child close to you with their education expenses? Or thinking of taking classes yourself? There are many options to help you achieve this goal. Are you planning to help your children, grandchildren or another child close to you with their education expenses? Or perhaps you are planning for your own education. We suggest taking some time to think critically about the future costs, which include more than the cost of tuition.
Determine your education needs
You can begin to create a college savings plan by defining your education needs and preferences:
- Would you prefer a private or a public school?
- What will it cost? How much is too much? Make sure you take college inflation rates into account.
- How long will it take, or how long do you have, to save?
The cost of college education. College costs generally increase at about twice the rate of inflation, from 5 percent to 8 percent per year. And these costs are already steep. According to collegeboard.com, the average tuition and fees for 2014 – 2015 for students were:
|Type of college or university||Cost per year**|
|Two-year public college in state||$3,347|
|Four-year public college/university in state||$9,139|
|Four-year public college/university out of state||$22,958|
|Four-year private college/university||$31,231|
**In addition, you may have to pay for room and board. In 2014 – 2015, average room and board costs for a public four-year college or university full time was $9,804.
Several other factors may also affect the cost of an education:
- Student’s age
- Academic record
- Financial aid opportunities (federal, state)
- Scholarships available
- Degree goal
- Housing costs (on- or off-campus)
- Military service
Common college saving plan options
- Custodial accounts (UTMA) allow you to make an irrevocable gift to a minor to an account that your child ultimately controls when he or she turns 18 or 21 (depending on state law). He or she can use the funds for tuition and other expenses, but the dollars do not have to be used for education.
- 529 college savings plans are generally sponsored by states, state agencies or educational institutions for qualified college tuition and expenses. These investment plans stay under your control and offer certain tax and contribution advantages.
- Coverdell Education Savings Account (CESA). You can contribute to this investment account only until children turn 18 unless the child is a special needs beneficiary. This type of account can be used for elementary, secondary and college expenses and tuition. It includes tax benefits but has a maximum contribution limit of $2,000 per year.
- Traditional/Roth IRAs. Penalty-free distributions are allowed from IRAs for eligible educational expenses for you, your children and your grandchildren. (Income taxes may apply to IRA and Roth IRA withdrawals). IRAs are not counted as assets for financial aid calculations, but withdrawals are considered financial aid income for parents.
- Other options. In addition to savings, current income and borrowing, there are other ways to finance higher education:
- Financial aid from federal and state governments
- Work-study programs or a part-time job for the student
- Loans from private, federal and college sources
- Scholarships and grants from different sources
- Family gifts
Borrowing from your retirement account to pay for education expenses
Borrowing from your home equity or retirement account — or reducing your retirement savings contributions to help pay for college — is an option. However, doing so could mean you’ll need to work longer than you planned before retiring. Encouraging your child to take out a loan for college, such as a Stafford loan, may mean that he or she will graduate with some debt. But remember that he or she will also have a much longer period of time to pay off the loan.
Other financial considerations for a college savings plan. As you explore college financing options and determine which program, or combination of programs, will best meet your needs, you may wish to talk to a financial advisor to guide you through the finer points such as:
- How does saving for education fit into your financial life? How can you resolve competing needs to save for retirement and a child’s education?
- What calculations are used by institutions in determining financial need?
- How will a college savings plan affect your taxes, financial aid eligibility and tax credits?
- What investment options do you have based on your risk tolerance and when the funds will be needed?
- Which currently held funds are accessible and what are the penalties for early withdrawal?
We’ll help you with a college savings plan
If saving for college is an important financial goal for your family, talk to an advisor about how you might start a college savings plan for yourself, your children, grandchildren or other children close to you.