College Savings Plans
- Building your child’s college savings plan doesn’t have to derail your retirement savings plan.
- 529 plans and trust funds are designed to help parents and grandparents save for your child’s education.
- Financial aid and private loans may be other options.
Retirement vs. education
As a parent of a child planning to attend college, you’re probably considering the increasing cost of education. How are you going to balance funding your child’s college education while planning for your retirement? Many families pay for college using some combination of savings and investments, borrowing, and financial aid (if available).
Saving for retirement and college at the same time can be a challenge for many families.
- You don’t want your child to be burdened with student debt, but you shouldn’t derail your retirement plans either.
- Withdrawing from your tax-advantaged retirement savings before age 59 ½ may result in IRS penalties if not used for qualified expenses.
- Sacrificing your retirement savings for your child’s education may end up putting you and your spouse or partner in a bind later.
You can’t borrow for retirement, but you do have options when it comes to financing your child’s college education.
You can’t borrow for retirement, but you do have options when it comes to financing your child’s college education. While you want to help your child reach full potential, most financial experts agree if funds are limited, saving for retirement should be the higher priority.
If you have a 401(k) plan through your employer, consider putting your initial savings there, especially if your company matches your contributions. The match is essentially free money offered to you for your retirement savings. Then consider contributing to your child’s education account if additional funds are available.
Save as early as possible
The sooner you start saving for college, the more money you may have when the time comes. There are tax-advantaged accounts to help you save for your child’s education that won’t impact your retirement savings.
529 college savings plans are tax-deferred accounts administered by states and institutions that let families — including grandparents, relatives, and friends — set aside money for college expenses. If you open a 529 plan when your child or grandchild is born, investing $150.00/month at a hypothetical 5.5% annual return, you could potentially save around $55,000 by the time she starts college.
Money from a 529 plan can be used for qualified higher education expenses. Those costs can include tuition, books, room, board, and equipment required by the school at any accredited college, university, or vocational school in the United States and at some international universities.
Other college savings accounts include custodial accounts in the child’s name. Distributions from these accounts should be used for the benefit of the child but are not restricted to education expenses. However, be sure you understand the tax considerations, especially the “kiddie tax.”
Coverdell Education Savings Accounts (ESA) are tax-favored investment accounts designed to help cover any qualified education expense, including those incurred in grades K-12. Caution: annual contribution amounts are limited to $2,000 per beneficiary.
Establish an educational trust fund
Another option is setting up an educational trust fund specifically intended for your child’s education. When you — or a grandparent or any benefactor — establish an education trust, you decide the terms of the trust, including who will control the money, how it will be used, and for whom the trust will benefit.
For grandparents, educational trusts may offer further benefits that go beyond contributing to their grandchild’s education. Although trusts allow more control and flexibility for the donor, they are more complex and expensive to establish than other alternatives.
Note that it’s important for grandparents to involve parents in deciding how they may help with college savings because the method selected may impact any potential financial aid your child may receive down the road.
Consider financial aid
Financial aid eligibility is based on a variety of factors, not just on need and household income. Many families mistakenly believe they won’t qualify for financial aid. They prematurely decide not to apply for assistance. In fact, according to the College Board nearly two-thirds of all full-time undergraduate students receive financial aid in the form of grants, loans, and work-study programs.1
Financial aid eligibility is based on a variety of factors, not just on need and household income.
When your child is in high school, start thinking about applying for aid. To learn more about eligibility requirements, application deadlines, and available types of federal financial loans and aid, visit the U.S. Department of Education’s Financial Aid Office.
For nonfederal financial aid, which generally assumes more family assets can be used for college costs, visit the College Board’s College Scholarship Service (CSS)/Financial Aid PROFILE® application. You may need additional information to qualify, including equity in your personal residence, nonqualified annuity values, and assets of siblings.
To bridge possible gaps between government aid and college costs, you and your child have the option of borrowing from a private lender. According to the Consumer Financial Protection Bureau (CFPB), students should borrow only what their future earnings will allow them to repay. The agency recommends students not accumulate more total student debt than they expect to earn as a starting annual salary.2
Banks, credit unions, and other financial institutions provide private loans. Loans may be fixed or variable depending on the lender and the borrower’s credit rating.
Other things to consider when borrowing from a private lender:
- Because private loans have higher fees than government loans, they are generally more expensive.
- Most private loans are taken out by students. This means the student is responsible for repayment.
- You may be required to co-sign a loan unless your child has established credit.
- Private loans may offer family relationship discounts, automatic payment discounts, and graduation benefits.
Look to income and existing investments
You may have other alternative investment sources to consider when paying for college that won’t require you to touch your retirement savings. Those may include stocks, bonds, securities, and mutual funds. If you do have available funds in cash and CDs, make sure those funds aren’t allocated to retirement.
Contact your Financial Advisor for help combining your investments to provide for your child’s education.
It’s a balancing act
When it comes to planning for retirement, managing your investment portfolio, and funding your child’s college education, it’s a balancing act. There are college-funding options for you to consider to help you avoid wrecking your retirement savings. The trick is to plan ahead.
- Avoid derailing your retirement plans to save for your child’s college education.
- Start saving for college when your child or grandchild is young by putting money into a 529 plan.
- Apply for financial aid even if you don’t think you’ll qualify.
- If a grandparent wants to help finance your child’s education, evaluate alternatives carefully.
Please consider the investment objectives, risk, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.
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