Many American families contend with the soaring costs of higher education. Even as tuition and other expenses continue to inch upward every year, parents and students can make college more accessible and affordable with some dedicated financial planning for education. Here are some ideas and financial vehicles that can help turn a student’s educational ambitions into reality.
Strategies for Saving for College: 529 Accounts and Alternatives
Since 1996, many families have used 529 savings accounts to save money for college expenses. Sponsored by U.S. states, 529 plans allow account holders to grow investments tax-free. After students enroll in college, they can make tax-free withdrawals to pay for approved education expenses. Some states also offer tax credits or deductions for contributions to 529 plans.
Other options for financing college include custodial accounts (UGMA/UTMA), in which adults can transfer assets like cash and stocks to a savings fund without a trust. Though these plans are flexible in many ways, they don’t necessarily have the tax advantages of a 529 plan. Coverdell education savings accounts (ESAs) do offer some tax-advantaged savings, but they have far stricter annual contribution limits.
In some cases, a Roth IRA can serve the dual purpose of building retirement wealth and financing an education. Whatever instruments you use, dedicated financial planning for education can reveal innovative ways to afford college.
The Role of Financial Aid
Lining up assistance for college expenses is a major part of financial planning for education. Many families turn to the Free Application for Federal Student Aid (FAFSA), which considers income and assets (including 529 plans) to evaluate a student’s need for financial aid.
There have been concerns that having too much in savings could lower the aid a student gets. However, assets in a parent-owned 529 plan only reduce aid by a maximum of 5.64%.
Balancing Saving for Education and Retirement
Parents are concerned with providing their children with an education without lapsing into excessive debt. Fueling these worries is a second ambition for parents: saving for retirement. The biggest difference between these two goals is that a student can borrow money to fund their education, but parents can’t borrow to fund their retirement.
It’s important to make retirement a big part of financial planning alongside education. Roth IRAs offer some flexibility thanks to their tax-free withdrawals for both retirement and college expenses.
Teaching Financial Literacy to Children and Teens
A benefit to including your children in financial planning for education is raising their awareness and literacy about money. Financial education should begin long before your child starts college—ideally in the home. It’s never been easier to educate kids on the basics of budgeting, saving, and goal-setting. This learning can support financial confidence that can last a lifetime.
As far as education is concerned, students can build their own awareness by being involved in conversations about the cost of tuition and tracking their own spending patterns. These small but powerful actions can lift the financial savvy of the entire household.
Start Financial Planning Today for Education Tomorrow
Financial planning for education isn’t just about college tuition. It’s about making the right choices in the present to preserve your family’s fortunes well into the future. The right strategy can alleviate the excessive burden of education costs while keeping your long-term savings for other goals intact.
The Valletta Group can help. Our holistic approach to financial planning for education takes your personal and family financial profiles into account. After you contact our offices, we get to work coordinating your finances with your long-term goals. To schedule a meeting, call (248) 720-1780 or email mswiecki@vallettagroup.com. We look forward to speaking with you!