by Daniel Shiu
With the average cost of college in the US estimated at $38,270 per student per year, and the average private, nonprofit university student spending about $58,620 per academic year living on campus (Educationdata.org), paying for college can seem daunting. Almost 90% of parents say they see a college degree as essential for their child’s success; however, only 44% say they felt ready to handle the first payment upon his or her high school graduation (College Ave). And the cost of college continues to rise. That is why it’s important to start planning and contributing early and to involve the entire family wherever possible. The following are a few tips to help ensure you and your family are on a good financial path to putting your child, children, or grandchildren through college.
Start Early
Open a tax-advantaged college savings account when your child is born. The earlier you can start, the less likely you are to “miss” the money you are contributing on a regular basis. The easier it can be to reach savings goals with compounding interest.
Get Finances in Order
Anytime is a good time to assess cash flow and eliminate unnecessary expenses and debt that could be eating into returns, especially when you are contemplating how to start saving for college. Consider starting with the highest-cost debt and working your way down to assess items that might be reduced or cut. This can help to free up money to invest and to grow more of the money that you have.
Get Other Family Members Involved
Including family members who might have expressed an interest in helping can be a great way to boost your child’s college savings. When asked about gifts for birthdays or other special occasions, consider suggesting that grandparents or other relatives contribute to a college savings account or give money toward future education expenses instead of traditional presents. Of course, not everyone has this option, and it’s not a requirement to save for your child’s college. But if it’s possible, it can be a meaningful and valuable way to support their future.
Take Advantage of Tax-Advantaged Savings Plans
The following are a few vehicles to consider.
529 plan accounts allow assets to grow tax-free, with distributions tax-free at both the federal and Hawaii state levels as long as distributions go toward qualifying expenses. These can include college tuition, books, computers, and some other expenses. Contributions are also tax-advantaged in Hawaii, but there is no state income tax deduction for contributions. Grandparents, family friends, and the student/beneficiary can also contribute. If the beneficiary decides not to go to college or use all of the money, the owner can also change the beneficiary to another child, or to an adult for a college or postgraduate degree. Recent legislation also allows for a partial conversion of 529 balances into Roth IRA contributions for the beneficiary.
Coverdell Education Savings Accounts (ESAs) are college savings accounts, similar to 529 plans, where contributions grow tax-free, and withdrawals are not taxable when used for qualified education costs. ESAs may offer a greater range of investment options, in bonds, individual stocks, and ETFs, for instance, and more investment freedom than some 529 plans. Contributions are limited to $2,000 annually per beneficiary. Families at higher income levels may also not be able to contribute. Contributions also need to stop when the beneficiary turns 18; other restrictions may apply.
Education-focused trusts can give parents more control over how, when, and to whom funds are allocated, and they do not have contribution limits. They may also be used as a vehicle to help reduce the assets considered by financial aid. However, they might also create an annual tax obligation on investment earnings, so it is important to talk with a tax professional about setting them up to address your needs.
Taxable investments such as stocks, bonds, mutual funds, real estate, and other investments may not offer the same tax benefits as a 529 Plan or ESA, but they can be a good supplement to paying for college. Putting money directly in these investments can help to maximize your wealth-building potential, without many of the restrictions that come along with other tax-advantaged vehicles.
Talk With Your Teen About College…and Finances
Start having small conversations with kids during high school years, with timing and depth of conversation dependent on maturity levels and your child’s interest in higher education. You might tell them about what you are doing to budget, what might be a realistic consideration for your family, and other potential sources of financing that might be available, such as merit money or scholarships that they could begin to talk with their guidance counsellor about and research on their own, as well as saving from a job.
Perhaps they might need to take out some loans and/or pay for a portion of their college education, depending on the family situation. As your family gets closer to making a decision, consider making a spreadsheet to compare alternatives and costs, with merit scholarships and other offerings. Consider options collectively on what is required to invest in a more expensive education, versus looking at other options that may necessitate less expense or debt.
Loans, Grants, and Financial Aid
When your child is of college age, consider completing the Free Application for Federal Student Aid (FAFSA) form and the College Scholarship Service (CSS) profile, required by some institutions. These aim to assess a family’s financial need and expected contribution based on the costs of higher education alongside the family’s income, savings, and other expenses.
Completing these forms can help to identify grants and scholarships for some. Additionally, they may give your child access to student loans that they can repay after graduation, often with fixed interest rates and income-driven repayment options.
Parents sometimes also consider taking out or leveraging home equity or other loans for their child’s education. However, it is important to understand terms, interest rates, and the risks.
Avoid Sacrificing Retirement Savings to Fund College
Putting your child’s well-being above your own is a noble action. However, in leveraging retirement savings, the benefits of compound interest on investments for retirement are lost, and there could be tax penalties. Additionally, you cannot borrow or take out a loan for retirement.
Plan
Perhaps most importantly, before you take action and decide how much you’re going to contribute toward your child’s college education, talk with a financial advisor to build a financial plan to pay for college alongside your need to save for retirement and plan for other lifetime wants and needs. Planning for the rising cost of college is much easier when it is done with a professional and is a family affair.
Daniel Shiu is a Financial Advisor with UBS Financial Services Inc., a subsidiary of UBS Group AG. Member FINRA/SIPC in Honolulu. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors, as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks, and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. For designation disclosures, visit www.ubs.com.
UBS Financial Services Inc. is not affiliated with any of the third-party entities mentioned. For more information, please review the client relationship summary provided at ubs.com/relationshipsummary, or ask your UBS Financial Advisor for a copy.
