10 Ways Parents Can Start Planning for College Expenses
College is expensive – plain and simple. Even more so if your child is interested in a niche field or four-year university. It can be challenging to start financial planning for college expenses, especially on top of the already demanding day-to-day costs of raising a family. Luckily, there are options available for parents to start saving for college, so relying on financial aid and student loans aren’t your only options.
When Should You Start Saving for College?
It's recommended for parents to start saving for college expenses as soon as possible. However, you likely have your own financial priorities and money goals that you need to consider. A general guideline is to begin saving for your child's college tuition after you've paid off any accrued debt, have a substantial emergency fund to cover unexpected costs, and have a solid retirement savings strategy in place.
The Best Ways to Get College Savings Started
There are many ways parents can start saving for a child's college tuition. Whether you started saving when your child was born or are preparing to begin, it's essential to identify your goal and how much you are willing to contribute. From there, evaluate your unique situation and choose from a few of the options below to start saving for your child's college expenses.
Prepaid Tuition Plans
Some colleges offer the opportunity to participate in a prepaid tuition plan. Rather than setting up a savings or investment account, you'll pay the state a preset amount when your child is young, which will lock-in your child's tuition costs. Prepaid tuition plans are becoming exceedingly rare, and they can present obstacles should your child decide they don't want to go to college.
529 Education Savings Plans
These savings plans add flexibility to where your child can attend school and often provide a state tax break for contributions. 529 Plans gains are tax-free if used for qualifying educational expenses. Each state has the ability to offer their own 529 Plan, so you're not locked into one state's plan, but some states have tax benefits for utilizing an in-state plan. Another perk of 529 Plans is that you can change the beneficiaries at any time. If one child earns a scholarship or additional funding, you can transfer their plan to another child.
Get Two Extra Years
Is your child interested in a niche field? What about a four-year university? Even though they might have their eyes on the prize to get into the college of their choice immediately, it's worthwhile having a conversation about completing their general education requirements at a community college first. Community colleges usually offer lower tuition, and general education requirements take anywhere from one and a half to two years to complete. Your child can also save money by living under your roof during this time frame.
American Opportunity Tax Credit (AOTC)
Save money during college by applying the AOTC to yourself, your spouse, or your dependents. You'll be able to deduct up to $2,500 from your tax bill per student each year, depending on your income level. Tax credits are more beneficial than tax deductions, as deductions are subtracted from your taxable income while credits are deducted from your tax bill. If you haven't researched the AOTC and other college tax deductions and credits, it's an easy way to get extra cash for your child's college expenses.
Coverdell Education Savings Account (ESA)
As a parent, you have the option to start an ESA for your child at their time of birth if you meet the income requirements. An ESA allows you to contribute up to $2,000 a year until your child turns 18, and the funds grow tax-free. Any accrued funds must be used by your child by the time he or she reaches the age of 30.
UTMA or UGMA (Transfer/Gift to Minors Act)
Unlike Education Savings Accounts (ESAs) and 529 Education Savings Plans, the funds in a UTMA/UGMA can be used for more than college savings. The UTMA/UGMA will be in your child's name, but must be controlled by a parent or grandparent. The parent or grandparent will manage the account until your child reaches 18 or 21, depending on the account type and state laws. Once your child reaches the designated age, they'll be able to use the funds however they wish.
Draw on Your Roth IRA
Roth IRAs offer impressive flexibility, making it easy for account holders to withdraw contributions for college tuition penalty-free. However, you won't be able to withdraw any gains – only the funds you've contributed. If you attempt to withdraw gains for college tuition, you may be subject to a penalty. Roth IRAs, along with other retirement accounts, are not reported as assets for financial aid.
College Savings Tips for Your Child
While parents contribute a lot toward college savings, it's important to remember you don't have to be the only source. Encouraging your child to start saving for college is a great way to get them involved and begin learning healthy financial practices. Below are a few creative ways to help your child start building their own college savings fund.
Apply for Scholarships
There are many different scholarships available that your child can apply for when it comes time for college. Scholarships are an excellent way to get free money for college, and you don't have to worry about paying it back. Give special consideration to where your child excels, as it's worthwhile to try to get them a reward for these efforts. There are many different topic-based scholarships, from academics and athletics to extracurricular activities and more. It's also recommended to have your child apply for state and federal grants as this is another opportunity to earn free money for college.
Take Advanced Placement (AP) Classes
While your child is in high school, they can earn college credits by taking AP classes. Encouraging them to enroll in and pass AP classes while in high school means you'll have one less class to pay for once they get to college. If you are interested in finding out more about the AP classes offered at schools in your area, it's encouraged to schedule an appointment with an academic counselor for more information.
Open a Savings Account
Helping your child open a savings account is an excellent way for them to store their money for college safely. It's worthwhile to explore the various student savings account options offered by banks because many have no minimum balance requirements and waive monthly maintenance fees. However, if you're setting your child up with a savings account before they turn 18, you'll likely have to be appointed as the joint account holder.
Start Planning for Your Child's College Today
Don't get discouraged if you haven't started planning for your child's college expenses yet. It's never too late. There are many useful ways you can begin saving aside from scholarships and grants. Here at Affiance Financial, our financial planners are aware of how costly college tuition can be – especially if your child is interested in a niche degree or four-year university. Contact us today for guidance in choosing the best option, so your child can get the college education they've been hoping for.
There can be no assurance that the content made reference to directly or indirectly in this blog post will be suitable for your individual situation, or prove successful. Due to various factors, including changing conditions and/or applicable laws, the content is only reflective of current opinions or positions and is subject to change at any time and without notice. Moreover, you should not assume that any information contained in this blog post serves as the receipt of, or as a substitute for, personalized investment advice from Affiance Financial. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives