Did you know the average ‘moderate’ cost for college in 2017-2018 was about $25,290 for an in-state public school? If your child or grandchild would like to attend a four-year school, you’re looking at about $101,000!
Education is extremely important, however; it should be something that is properly planned for. If you’re planning to help a child in your family pay for higher education expenses, start developing a plan of action now.
There are several investment vehicles you can use, including:
529 college savings plan: 529 college savings plans, otherwise known as Qualified Tuition Programs (QTP), are offered in more than 30 states. These plans allow you to contribute after-tax money to an account, and then, when your child begins to pay for qualified education expenses, they withdraw the money tax-free.
Each state has various contributions limits, investment options, and fees associated with the account. You can invest in any state’s plan, no matter your state of residence or the location of the school your child will attend. If your child decides not to go to college, the beneficiary can be changed.
In Ohio, you can deduct up to $4,000 a year on your state taxes if you use Ohio’s 529 plan. For additional information for Ohio residents, click here. For Kentucky residents, click here; for Indiana residents, click here.
Roth IRA: Just like with a 529 plan, you contribute to the account with after-tax dollars and you earn tax-free growth.
Traditionally, you can’t withdraw earnings from this account without penalty until you’re 59 ½ and you’ve held the account for at least five years. However, you are allowed to withdraw earnings for qualified education expenses (you can withdraw your contributions at any time).
And if your child decides not to go to college, you’ll still have the money to help fund your retirement.
The contribution limit for people under 50 is $5,500 a year, and $6,500 over 50 years of age. Keep in mind there are also income limits.
Coverdell Education Savings Accounts: A Coverdell Education Savings Account (ESA) is another tax-advantaged account. When applying for federal financial aid it is not considered an asset. The contribution limit for an ESA is $2,000 a year, and there are income limits. For more information about this account, click here.
Simply Money Advisors recommends partnering with a trusted financial planner (preferably a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®) to help you determine the best account for you and your family’s education needs.
But deciding which account to use isn’t the only thing you’ll need to plan for when saving for your child’s education. You’ll also need to develop a plan to maximize the amount you can put towards education expenses. Here are a few tips:
Start as early as possible: Start saving today! The earlier you start, the more time the money has to grow. Even if you can only contribute $50 a month, it will still be helpful come time for college payment. Every little bit counts.
Put all accounts in your name: If your child or grandchild has to apply for federal student aid you don’t want assets listed under their name. It could prevent them from getting the aid they need. Here is a list of items that can affect your child’s student aid funding.
Find other ways to save: Review your budget and expenses. Determine if there are areas you could cut back in order to save more for your child’s education. Even a few extra dollars a month could yield large contributions when it's time to pay for college.
Automate your savings: Determine a certain amount you would like to contribute monthly. By automating your savings, you won’t have to think about the contribution and you can be sure it will happen on a regular basis.
The Simply Money Point
If you want to help your kids or grandkids pay for the increasing cost of college, educate yourself about all your options – and always remember that funding your own retirement should still be your #1 priority.