Six Things for Parents to Consider When Saving for College
Updated: Nov 21
#1 – Your retirement.
It’s been said that you can borrow money for college, but you can’t borrow money for retirement. If an airplane runs out of oxygen, you put your mask on first, then you put the mask on your child. When saving money, you should save money for yourself first -- an emergency fund, retirement, etc., before you set aside money for your child’s education. With that said, if you have more than enough money in your IRA, you might want to use some of those funds to pay for your child’s education. Keep in mind the tax consequences of the withdrawal even if you are able to avoid paying a penalty for an early withdrawal.
#2 – Where’s the money?
If you think your family will qualify for need-based financial aid, you might want to keep college funds in your name rather than giving them to your child. Typically around 20 percent of a student’s savings are expected to go towards college costs in a given year when calculating need-based aid. However, under six percent of the parents’ savings are expected to go towards college costs.
#3 -- Uniform Gifts to Minors Act (“UGMA”) or Uniform Transfers to Minors Act (“UTMA”) Accounts.
These accounts are the typical account that parents might start for a child as a baby as a place to deposit birthday money, etc. The accounts are in the name of the child, and children typically gain access to the money at age 18. Earnings and capital gains are reported to the child, and this may lead to paying taxes while the child is a minor, but the child’s tax rate might be lower than the parents’ tax rate.
#4 – Prepaid Tuition Plans (529 plans).
Under these plans, earnings are not taxed and the withdrawals are not taxed either when they are used for eligible expenses. This plan is less flexible than a college savings plan since the money is supposed to be used for in-State tuition costs. You should be able to use some of the money to attend out-of-State colleges and private colleges, but the money might not convert in a generous manner. You may be able to get some of the money back if your child does not attend college, but you may face a penalty for cancelling a contract.
If you leave a State but your child still attends college in the State you are leaving, a prepaid plan may help you secure in-State tuition in the State you leave. Prepaid plans can also help you lock-in tuition costs and protect you from tuition hikes. Here is a link to one State’s prepaid tuition plan’s website: College Savings Plans | College Tuition Funding | Florida Prepaid (myfloridaprepaid.com).
#5 -- College Savings Plans (529 plans).
These savings plans are typically more flexible than a prepaid plan. If you move to a new State, the money can rollover tax-free at the Federal level if you have not already rolled the funds in the prior 12 months. These plans can have low minimum contributions and high maximum contributions.
The US Department of Education is implementing a revised formula for need-based financial aid for the 2024-25 school year. Under this new formula and written guidance from the US Department of Education, money saved in a 529 plan only counts as a parent asset if it is in the name of the student who is applying for financial aid. Families should consider placing 529 funds in the name of a different person in the family.
#6 -- Coverdell education savings account, aka Education IRAs.
These savings accounts are available to families with incomes that fall below a given threshold and contributions are capped at $2,000 a year. These savings accounts may offer more investment options than a 529 and greater portability across States. However, the funds may only be used by the named beneficiary. Topic No. 310 Coverdell Education Savings Accounts | Internal Revenue Service (irs.gov)
For more information about financial aid in general, please visit our website at Paying for College | Educ8Fit Consulting. For additional information about what schools might be a good fit for you or your child, please see our website at https://www.educ8fit.com. Please contact us at Educ8Fit Consulting at either Jim@Educ8Fit.com or College Admission Counseling | Educ8fit Consulting | United States, contact for a free consultation.
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