College Planning Tips

Many parents wonder when to begin saving for their children’s college tuition. The simple answer – the sooner you start saving, the better! It is important to be aware of all available options to be prepared for the day your children start applying to their dream schools. Even if your toddler is just learning to walk, they will be taking their first step onto a college campus before you know it.

Before you begin saving, it is essential to confirm you are saving enough for your own retirement. However, if you are ready to start saving for your child’s tuition, there are many options for this. The most beneficial options include 529 plans, prepaid tuition plans, and Roth IRA Accounts.

529 Savings Plans are the most common approach parents take when saving for college. 529 plans can be opened at any time, even before the child is born. There is no income restriction for opening a 529 plan, and the money invested grows tax free. Single parents can contribute up to $70,000 per year, and married couples up to $140,000, without being subject to the federal gift tax. Withdrawals from a 529 account can be taken at any time for any reason. However, if the money is not used for qualified higher education expenses, any earnings are subject to federal income taxes at the recipient’s rate and 10% penalty on earnings, not principal.

Prepaid Tuition Plans are investment accounts that allow parents to pay for their child’s future college tuition at today’s prices. Parents can choose to pay it all upfront, or prepay a portion of the expense. Prepaid tuition plans are administered by individual states, and can be redeemed at public universities in that state. If the child chooses to go out of state or to a private college, many states allow you to transfer the plan, but require the family to pay the difference.

Roth IRA accounts are often used for retirement, but can be used for college savings as well. Withdrawals of the principal amount from a Roth IRA are tax free. If the IRA account is open for at least 5 years, and the account holder is over age 59 ½, withdrawal of both earnings and principal are tax-free. Roth IRAs are sometimes preferred over 529 plans because IRAs often have higher interest rates and give more freedom and flexibility on how to invest funds. Also, if the child chooses not to go to college, parents can shift the invested funds towards retirement, rather than facing withdrawal fees that a 529 plan would entail.

There are many options available for your kids if you realize you are unable to pay their entire college tuition. A few options include scholarships, grants, and loans.  We have provided some additional information on each of these options:

Scholarships are one of the most beneficial forms of financial aid because they do not have to be paid back. There are several ways to apply for scholarships, with over 1.5 million for students to choose from. Scholarships come in all shapes and sizes, varying from prestigious scholarships, full tuition scholarships, community service scholarships, and athletic scholarships.

Grants are similar to scholarships because they are also not required to be paid back. Grants are allocated by agencies for accomplishing specific goals. The application process is free, and there are many grants to choose from. Two grants that frequently stand out to college students are merit-based grants and need-based grants. Merit-based grants are for students who have demonstrated high levels of academic achievement, commitment to different services, and/or leadership roles. Need-based grants are also rewarded for academic achievements, but are more closely linked to family income and economic eligibility. State sponsored grants are also obtainable, which benefit students who choose to attend a university within the state they reside.

Loans are also an option that are utilized by many college students. The most common is the Stafford loan which undergraduate or graduate students are eligible for if they are enrolled at least part-time. The Stafford loan is available as either a subsidized or unsubsidized loan. Subsidized loans are more beneficial because the federal government will pay the interest on the loan while the student is in school, where as an unsubsidized loan accumulates interest throughout the student’s college career. Undergraduate students may borrow a cumulative amount of $31,000 ($5,500 the first year, $6,500 the second year, and $7,500 for the third year and beyond).  Loans can be used for any college costs, including housing and textbooks. The interest on the loans vary each year, but the interest rates are fixed for the life of the loan. No payments are required on a Federal Stafford loan until six months after the borrower graduates or drops below part-time enrollment. Besides the Stafford loan, other common loans are parent plus loans, and home equity loans.

With the right planning, you can help fund your child’s education without impacting your own retirement or other plans. It is never too soon to begin saving, and your financial advisor can help you choose the plan that will best fit your family. If you have any questions or are ready to start saving, please contact our office (610-651-2777).  We would be happy to help!