Building a Bright Future: College Savings Strategies
As a new parent, or a parent of a child entering school-age, you may have one thought, “When and how are we going to start saving for college?” There are several choices to make when saving for college and you need to consider what is best for you and your children. College tuition is on the rise every year, and it is causing more people to reconsider attending due to the high costs.
Most high schools only focus on student loans. While student loans are a viable option when looking to attend college, we are always looking for ways to minimize future debt. I want to be able to tell my children that if they wish to attend college then here is the money we have been saving for you. Now I do not have children yet, but I know this is something that I am actively thinking about and ready to prepare myself and my husband for when the time comes.
While I never went to a traditional college, both my sister and sister-in-law have, so I was able to witness the steps they took in preparing for college. I remember looking into the college booklets and reading the costs of tuition, fees, room and board, books, supplies, and miscellaneous costs. My sister opted to travel to school and live at home, which is an option when looking for ways to save when attending. On the other hand, my sister-in-law moved to her college and was able to get the full college experience, of course this included all the additional expenses.
Some questions that arise when looking into saving for college:
1. What is the average tuition costs?
2. How much should I save for college?
3. Are there options when saving for college?
4. What if my child does not want to attend college?
Tuition Costs
Let us start by looking at tuition costs. The average tuition costs vary from state to state, however, according to Business Insider, the national average is $10,440 if going to a college in your home state and $26,820 for an out of state school. Now, let us add $8,060 for room and board for a public college and $10,440 for a private institution. That is the per year cost. $18,000 to get an education. When looking at all costs, we need to remember that there are additional costs all the time as well. Remember these words when saving for college, “The money you saved, is money that you will not have to pay back with interest on a student loan.” Student loans, while always an option, allow for more negative debt than positive experience.
How much should I be saving for college?
When it comes to saving for college, you need to consider all the different schooling options that are available. Your child may consider going to an in state public college, which is the least expensive options. If you child is looking for a specific degree, they may need to attend and out of state private school, which is more expensive. The most expensive would be Ivy League schools. There are always options for scholarships, you still want to keep into account that many other students are applying for scholarships as well. If you are looking to cover 100% of the cost for your child, you should consider saving for an out of state school. While your child may not use this option, this will assist you in ensuring you save enough as the tuition may be raised in the 18 years before they get to college.
What options do I have for saving for college?
When saving for college, there are a variety of options available. There are some that can provide some tax savings and even options if your child decides not to attend. Listed below are many resources for you to review and compare when saving for college.
Some great ways to save are:
• 529 plans
• Roth IRAs
• Coverdell Education Savings Accounts
• CDs and savings bonds
• Trusts
The most popular savings plan is the 529 plan, but the ultimate decision on saving for college is yours.
Listen Money Matters has a great comparison chart on the different options that I have simplified below.
| 529 | Coverdell | Bonds | Roth | UGMA/UTMA | |
| Tax Savings | Depends on State | No Tax deduction, grows tax-deferred, spent free | No Tax deduction, grows tax-deferred, spent free | No tax deduction, grows tax-deferred, no tax in withdrawal | No Tax deduction, growth is taxed at a high kiddie tax rates |
| Spending Flexibility | Can only be spent on K-12 tuition and most college expenses | Can only be spent on most K-12 tuition and college expenses | Can only be spent on college tuition and fees | Withdrawn expenses can be spent on anything | Assets belong to child and can be spent on anything |
| Transferable | To any family member | To any family member | Can only be used on self, spouse or dependent child | N/A | Not Transferable |
| Contribution Limit | Annually, limited to $15,000 per year | Hard limit of $2000 | $10,000 per year per bond owner | $6000 per account | None |
Just by looking at this simplified chart, you can see why the 529 plan is always the most popular as there are many benefits. The website also goes in depth about the different options and the benefits and negatives of each strategy.
What if my child does not want to attend college?
Now I think we should also consider that you have saved money for college and your child tells you that they decided they are not going to go. They want to do something different and they are done with school in the formal setting. This is the route that I took. While I love learning and want to continue learning daily, I knew that I personally did not want to attend college. I did attend a trade school where I was able to learn a new skill and I was able to get a college degree, but this is not always the case.
https://www.schwab.com/resource-center/insights/content/529-account-what-happens
Schwab has a great article for if your child decided they no longer wish to attend college. You want to make sure that you are prepared for this conversation as well. While college is a great option, there are many pros and cons. A previous blog post can break this down for you. https://molentax.com/is-college-still-worth-it/
You have been adding money to the 529 for your child and they tell you they are not going to college, but they want to learn a trade. Luckily, there are ways that this money can be used in other ways, so it is not a total loss of savings. It should be known that a 529 can be used for any educational outlets. A 529 can be used for two-year associate degree programs, trade schools and vocational schools. Of course, it is always best to research on if this money can be used on the options that are taken by your child. They are the ones who ultimately decide on what they want to do for their future.
Another option is that you can transfer the account to another beneficiary if it is a family member. This includes yourself, sibling, first cousin, grandparent, aunt or uncle. You would not incur any income taxes or penalties. Luckily, you change the beneficiary once a year, so you can always change back to the original person should the plans change. You can use some of the fund for yourself and the add the remaining to a different family member.
Can I withdraw the amount in the 529 plan?
The short answer is yes you could withdraw the money, however, there are some penalties you will be hit with if you chose this option. You will need to pay federal income tax and take a 10% penalty on the earnings. A good thing to remember also, if your child does wish to attend college and received a full scholarship, you can withdraw from the 529 plan and the penalties are waived.
Remember, while college is important, it is not always going to be the best for your child. They may consider a different career path that does not require college education. We always want to be sure we are considering all the options. The money you are saving can be used for something else should the need arise. Make sure you are asking questions as your child is getting older. You do not need to stop asking “what do you want to be when you grow up” when they are older. You can ask this question as long as you need to. Even when they no longer want to answer you, you need to be open with your children and make sure that they know that you are asking to know how they are planning for the future and how you can help.
Jessica Powaserys
Client Advocate
Sources:
- https://www.businessinsider.com/personal-finance/average-college-tuition#average-student-loan-debt-taken-on-per-year
- https://www.listenmoneymatters.com/saving-for-college/
- https://www.schwab.com/resource-center/insights/content/529-account-what-happens
M&A Blogs: https://molentax.com/is-college-still-worth-it/
