How do you begin to save for your children to go to college?
With the rising costs of college education, is it worth the monetary commitment?
Including tuition & fees, room & board, books & supplies, etc. the average cost of college is anywhere from $27,000 for an in-state public school up to $80,000–$90,000 a year for an Ivy League School.
How you pay for college is one of the most important financial decisions you’ll ever make. In this episode, we cover the three phases of saving for college and what you need to pay attention to in each phase.
Phase #1: The Saving Phase
We recommend that you maximize your own retirement savings before focusing on how to pay for college. You can always take a loan for college—you can’t take a loan for retirement.
From there, your best choice is to open a 529 Savings account. Why? The money grows tax-free. Secondly, some states like Virginia and New York will give you a tax deduction on contributions.
How much should you contribute? Save enough for in-state college costs (approximately 50%). Why not 100%? If your child decides not to go to college or receive a scholarship, withdrawing the funds for use outside of college can have negative tax consequences.
Overall, you’re limited to saving $18,000 per person per beneficiary. That means you and your spouse could contribute up to $36,000 a year.
But how do you choose a 529 plan? What other ways can you save? We cover them in this episode.
Phase #2: Preparing for College
You don’t need to stop saving when your child goes to high school. However, now you need to focus on how much you can afford to pay. You need to communicate proactively with your teenager. The “Let’s get in and then figure out how to pay for it strategy” isn’t the way to go. Knowing your budget will help them create a college list that’s reasonable for their situation.
When they’re in high school, you need to think about financial aid, college cashflow and budgeting, tax aid, lending strategies, and the overall college application process.
When it comes to financial aid, we have to remember that everyone’s financial situation is different. Just because a neighbor, friend, or family member received a lot of aid doesn’t mean you’ll get awarded the same amount.
The FAFSA is the form you need to complete to determine the amount of aid your college student would receive (based on your income and assets for you and your child). They look at non-retirement accounts, income from your tax return, and much more.
Many of our clients make too much to receive financial aid. However, you are still required to complete the form for merit scholarships.
We cover the other areas you need to consider to take a proactive approach in this conversation.
Phase #3: In-College Strategies
How does this all play out in real life? We see people paying for college expenses from their existing cashflow and savings, Roth IRA contributions, withdrawals from the 529 account, or loans.
Withdrawals from a 529 account are usually sent to the owner of the account (the parent or school) to be used for tuition and fees, books, computers, room & board, etc.
You can spend up to $10,000 of a 529 plan on student loans over your lifetime. $10,000 can also be used toward K–12 private schools. Up to $35,000 of unused money can be rolled over into a Roth IRA (but penalties will apply).
You must continue to fill out the FAFSA every year the student is in college.
Outline of This Episode
- [1:53] Why college? Is it necessary?
- [2:41] Average cost of college
- [4:42] Phase #1: The Saving Phase
- [10:02] Phase #2: Preparing for college
- [20:44] Phase #3: In-college strategies
- [22:57] Summarizing the big points
Resources & People Mentioned
- The Retirement Podcast Network
- Social Security – Lifetime Earnings of College Graduates
- Morningstar – How to Choose a 529 Plan
- The FAFSA Application
- IRS – American Opportunity Tax Credit (AORC)
- IRS – Lifetime Learning Credit
- Independent Education Consultants Association
- US News – Qualified 529 Expenses
- Charles Schwab – 529 to Roth Rollovers
