Saving for College
Almost daily, I read articles and internet posts warning that our children will be a generation crippled by the soaring cost of attending college. Nearly 70% of 2013 graduating seniors had student loans with an average of $28,400. From 2004/05 - 2014/15 college tuition and fees for a public four-year university rose on average, 3.50% above inflation. It is likely that your child will have to borrow some funds for college. Hopefully, with the aid of the right long term plan, there is a way to minimize this burden so our children will not be hobbled by student debt as they start their careers.
*Inflation-Adjusted Published Prices
As with saving for retirement, it is never too early to start planning for your kid’s college education. The earlier you start saving, the bigger the account can grow which lessens the amount you actually have to put aside. The big question; do I save for college or save for retirement? This is a tough question and a valid concern. Your children can borrow for college, but you cannot borrow or get a scholarship for your retirement. Early in your child’s life, it is a good idea to include both their education and your retirement goals into your financial plan. One thing you definitely do not want to do is use your retirement funds to pay for college.
So, how do you start saving? There are a couple of saving vehicles specifically designed for putting money away for college. These plans have tax incentives to encourage saving towards higher education.
Section 529 Plans and Coverdale ESAs are the two vehicles often used to save money for college. We will focus on the 529 plan in this blog. According to a recent Sallie Mae study, only 27% of parent's saving for college utilize 529 plans. Over half of all college savers are doing so through CDs, checking and savings accounts and missing out on potential market gains, and in many cases, not even matching inflation.
A 529 Plan is an education savings plan operated by a state or institution designed to help families set aside funds for college. Most plans can be used in colleges in states other than the state that sponsors the plan and nearly all states now offer a 529 plan. The plans have tax benefits associated with them as long as the funds are used for qualified expenses.
We recommend a tax advantaged vehicle for education saving, such as the 529 savings plan, invested in a low-cost, passively-managed, diversified portfolio. The portfolio should take into account the child's time horizon until beginning college and you should adjust the risk profile regularly.
Top benefits of 529 Plans:
- Federal Tax Benefits - Your investments grow tax-deferred and qualified distributions come out tax-free.
- State Tax Benefits – Some states offer tax benefits as well.
- Donor maintains control of funds – The named beneficiary has no rights to the funds. There is a 10% penalty and tax on earning if funds are not used for qualified expenses).
- But wait, what if my child doesn't go to college? - 529 plan funds can pass tax-free if rolled over to a member of the original beneficiary's family. Their family includes:
- Brothers, sisters, stepbrothers, and stepsisters.
- Son, daughter, adopted child, foster child, or any descendant of any of them.
- Father, mother, stepfather, or stepmother.
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, or sister-in-law.
- Spouse of any of the relatives listed above.
- The original beneficiaries first cousin.
- Funds do not have to be used for traditional four-year college educations - Distributions are tax-free if used for qualified education expenses at eligible education institutions. These eligible institutions are any college, university, vocational school, or other post-secondary school eligible to participate in the US Department of Education's student aid program.
- Ease - 529's are an easy way to save once you choose the plan that is right for you and the enrollment forms are complete.
- Eligibility - Everyone is eligible for 529 plans as there is generally no income limits (note, be sure to review the plan you choose).
- Financial Aid - 529s don’t show up on FAFSA forms. This is good news. When it comes time to apply for financial aid, money in 529s is for all intents and purposes hidden from government eyes.
As your child gets closer to graduating high school you should start investigating how they can get assistance paying for college via grants and scholarships.
To be eligible for financial aid you must complete the Free Application for Federal Student Aid at FAFSA.ed.gov released each January 1st. Most schools only require that form. Some also require a completed CSS/Financial Aid PROFILE. This can be found at collegeboard.org.
Integrating retirement savings and education savings can be a difficult task and requires time to create a good plan. A really good informative website that I recommend using is http://www.savingforcollege.com/.
The advisors at Siena can help navigate and put together a plan for you to ensure the success for your children’s future. Contact us today!
Coming Soon: The Siena Investor Blog Series: "The Importance of Utilizing an Investment Professional"
W. Joseph Irish earned a bachelor’s degree in business administration from Western Michigan University with a major in accounting and is a Certified Public Accountant (CPA) and holds a Personal Financial Specialist (PFS) designation from the American Institute of Certified Public Accountants (AICPA). Prior to joining Siena, Joe spent 15 years as Chief Financial Officer and 9 years as shareholder at a successful logistics firm that specializes in rail transportation logistics.