Saving for college is probably one of the most daunting tasks for any parent to tackle. I mean, how can we think about saving for college, when we’re barely getting by? Or we’re just starting our family?
Well, the truth is, saving for college early is the key to success. Yes it’s stressful, yes it means making some sacrifice, but the reward will be the ultimate in parenting achievement.
Ticas.org states that almost 66% of graduates from public schools, and 75% of graduates from private schools, leave school with debt. That’s a daunting fact if you think about it. Here they’ve just graduated college, hoping to find a job, and they’re starting in the hole. The average is almost $30k in debt!! That’s a down payment on a house in most areas of the country.
But look, I know there are schools and degrees, like Doctors, and Engineers, that you are probably, ok most definitely, going to graduate with substantial debt. But chances are they will also make a substantial living.
What about the rest of us that earn a decent, or even modest living? I went back to school at 32, to get a degree in web design. A degree that I use sparingly. Do I use the skills that I learned, sure, but I’m not a web designer, I’m a realtor that does some web design. I realize that I am like lots of people that get a degree that we might only use sparingly, or for a short period.
So how do we spare our children this same feat of starting life out with a giant looming bill? Let’s talk about saving.
- Tax Advantage 529 Plan– A 529 plan is designed specifically for education costs and will keep your money separate from retirement savings. You contribute after-tax dollars which are allowed to grow tax-free and are to only be used for education purposes. And sometimes your tax-deductible are tax-deductible, depending on the state you live in. It also doesn’t have the income stipulation that a Roth IRA has, which is limited to only people who earn less than $133k single or $196k married
- Pre-Paid College Tuition Plans– These plans are just what they sound like. You pick a school and purchase college tuition at a locked-in rate today. You redeem the credits at a later day and the school absorbs any price/tuition difference over time. This is a great idea if you expect your child to be an alumnus at a state school that you’ve also attended.
- Roth IRA– Yes you can use a Roth IRA for school. Is it the best plan? Probably better to go with a 529 account, but you can use a Roth. The biggest plus on pulling out money for education out of a Roth versus a traditional IRA is that you can pull out the money before 59.5 without the 10% early withdrawal penalty. And a little known fact, but you can roll your 401k money into an IRA to use for education purposes.
- Gift of College Funds– The entire point of Gift of College was to help family and friends contribute college funds to their friends and family. Once your college student has set up an account with the company, anybody can contribute and donate. You can contribute directly to the child’s account. If you’re not sure if they have an account, you can purchase Gift of College cards with pre-paid money. Then they simply sign-up for an account and use the cards. It’s simple, easy, and a great way to make sure that money gets where it needs to be.
- UPromise– UPromise is a loyalty program where you accrue credits that are then applied to a tax-free 529 savings account. They can earn rebates from grocery stores, retail shops, restaurants, online shopping. There are currently over 10,000 restaurants and over 20,000 grocery and drugstores that are signed up and offering rebates.
- LEAF College Savings Cards– Like Gift of College, Leaf College Savings Cards, can be purchased and given to the student of your choice. Purchased thru their website, they are a great gift for everyone from a small child, to an enrolled college student.
- Coverdell Education Account– Coverdell was the first education savings account, the predecessor of the 529 Plan. Like the 529 Plan, they are both tax-free when used for education purposes. The largest difference between the two plans is that the 529 plan is only used for tuition, the Coverdell account can be used for other education costs, like books, etc.
- UGMA and UTMA Custodial Account– These accounts are used to hold and protect assets from minors until they reach adulthood. These accounts typically hold such things as stocks, bonds, and mutual fund investments. Most accounts must be handed over to the minor anywhere from 18-21 depending on the state. The biggest disadvantage is while a small amount is taxed at a lower child’s rate, the rest of the income is taxed at the parent’s rate, which will be substantially higher.
A little planning on the part of parents goes a long way when it comes to providing for the kid’s college fund. But never forget, that it’s never too late to start. Anyone of these options is a good option for a child that has nothing started. Don’t procrastinate or wait, your child’s future depends on it!
