It is never too soon to begin saving for your child's education and while you may feel that putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college.
Most people look at the price of a college degree as an expense, like the electric or cable bill. But what if you looked at it as an investment? According to the U.S. Census Bureau, in the year 2009, the average male college graduate, aged 25-34, earned 85% more than the average male who completed only high school or had a General Education Development (GED) certificate. Among women the same age, college graduates earned 111% more than non-graduates.
Over a lifetime, the additional earnings resulting from this “investment” in education could easily exceed $1 million.
Those days are gone, and that's why college planning is so important. According to The College Board®, the average 2014-2015 tuition increase was 3.7 percent at private colleges, and 2.9 percent at public universities. The ten-year historical rate of increase is approximately 5 percent. These figures are substantially higher than the general inflation rate. They are also higher than the average increase in personal incomes.
Remember when a college education was reasonably priced?
College Savings
UGMA and UTMA Custodial Accounts
Offer tax-free growth for education expenses.
- Pros: Cover a broad range of expenses, including college and K-12 expenses, while offering more investment choices.
- Cons: Impose income restrictions and a low $2,000 contribution limit. Current tax benefits extended only for two years.
- Financial-Aid Impact: Minimal, if treated as parental asset
If money is tight, would your child be willing to complete their first two years at a local community college, then move on to their preferred college or university later? Tuition likely to be much less at a state community college, and you could realize additional savings if your child attends school while living at home. If your child does not wish to start college locally, it may be worthwhile to look into the myriad of scholarships, work study programs and off-campus jobs that may be available. The guidance office at most schools will have job information available if you inquire.
If your child is already in high school, you may feel it's too late to start saving for college. But think again. ANY preplanning and saving you can do is better than nothing. If you are in a time crunch to save, start thinking of ways to reduce your monthly expenses and increase your cash flow NOW. Then look at some ways to invest what you've saved. There are many options beyond a traditional savings account, such as CDs or money market accounts. Do some research, or better yet, enlist the assistance of a financial professional.
It is never too soon to begin saving for your child's education. Many parents start as soon as a child is born. Some parents begin planning before children arrive. If you're planning on having a family "someday", start planning now. If you have a child on the way, start now. If you have an infant, toddler, grade-schooler or teenager, start now. Notice a theme here?
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Coverdell Education Savings Accounts
Families make an upfront payment in exchange for future tuition contracts or credits
- Pros: Prepaid plans aim to cover tuition no matter how much it increases.
- Cons: Some states, facing budget woes and rising tuition, have had to close their plans to new participants, raise prices or impose fees.
- Financial-Aid Impact: Minimal, if treated as parental asset.
The simple fact is - the sooner you plan, the better.
Why and when should you plan for your child's higher education?
The Road to College
How soon is too soon?
At Gundrum Insurance & Investments, LLC, we'd like to assist you planning for your child's college expenses.
Sources: WSJ Research, FinAid.Org
Interest earned on the Series EE or I bonds is free from taxes if used for qualified higher-education expenses.
- Pros: Among the safest investments.
- Cons: Currently, bonds pay a relatively low rate of return while the tax break is limited.
- Financial-Aid Impact: Income from the bonds is considered income under aid formulas
529 Prepaid Plans
Here are some options to consider for college savings vehicles
You need a break.
While you may feel that putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college. Remember ... student loans are available. While you may not want your child to assume such a financial burden, you could always help out with repaying the loan later. Also, by having your child be responsible for at least a portion of their college tuition or expenses, they may experience a greater understanding of and appreciation for the value of their education.
How late is too late?
If you haven't begun planning, start now -- there is no better time to get the proverbial ball rolling
Investors can generally withdraw their original contributions without taxes or penalties not only for college, but any reason.
- Pros: Offers more flexibility and investment options.
- Cons: If the parent is relying on the account for retirement, any withdrawals will chip away at the nest egg.
- Financial-Aid Impact: Assets aren't counted in aid formulas, although withdrawals of a contribution are treated as income under aid formulas.
Roth IRAs
Where to Save
If you haven't begun planning, start now -- there is no better time to get the proverbial ball rolling. You may be surprised how a little planning now can make a big difference in the years to come
Other Alternatives to consider...
What about your retirement?
Qualified distributions are tax-free, and many states offer tax deductions or credits for contributions.
- Pros: Can result in big tax savings for families able to sock away substantial sums.
- Cons: Some plans may have limited investment choices and charge high fees, and savers can face taxes and penalties if the funds are pulled out for other purposes.
- Financial-Aid Impact: Minimal, if treated as parental asset.
529 Savings Plans
A tax break, that is. Many higher education savings vehicles can provide one, such as 529 plans, Coverdell Education Savings Accounts, and certain kinds of tax-exempt bonds. However, as the number of tax-advantaged college savings vehicles have increased, so have the details, rules and "fine print" pertaining to them. In fact, some of these tax breaks could conflict with one another. Unless you're willing to spend a great deal of time doing research, it may be wise to speak with a financial professional who can help you sort through these options.
These are the views of Peter Montoya Inc., not the presenting Representative nor First Allied Securities, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services.
Savings Bonds
Taxable Brokerage Accounts
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Accounts in which the parent acts as trustee. Offer some tax benefits where the first $950 of investment income is tax-free. Any income between $950 and $1,900 is taxed at the child's rate, and income above $1,900 is taxed at the parents' rate.
- Pros: Can be used for most anything as long as the proceeds benefit the child.
- Cons: Students gain control of the accounts when they come of age.
- Financial-Aid Impact: Since the accounts are in the child's name, they are counted more heavily in financial-aid formulas.
Families can save for college in a standard taxable portfolio.
- Pros: Investors have complete control over their investment decisions; accounts can be used for any purpose.
- Cons: Investors are likely to face a tax bill on growth and withdrawals.
- Financial-Aid Impact: Federal aid formulas count the value of the assets in the account (minus any margin loans) at the time the federal financial aid application is filled out.
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