College is an important next step for many high school graduates. But college tuition and room and board costs continue to rise and it's likely the numbers will only increase. To help you consider ways to save today to help you ease the financial concerns associated with the expense of college, Donna Walton, Wealth Strategist at TD Wealth®, provides the following tips.
Look at your total financial plan
Financial planning for education can start even before a child is born.1 But the first thing you should do is take a step back and look at your current overall financial picture. As necessary as it is to set aside money for your child’s education, it’s important to take care of your own needs first. When you're on an airplane, it’s recommended that you put your own oxygen mask on first, before helping others. The same applies to financial planning for education. Make sure your retirement savings, and any financial obligations, are on track. You can't take loans to support your retirement, but you can request tuition and room and board assistance from colleges and universities, take student loans and apply for independent grants and scholarships to help pay for college.
Estimate future costs
Talk to a college advisor about the comparative costs of public versus private institutions and use a college tuition calculator to give you an estimate of future tuition and room and board costs. Consider, for example, the cost differences between an in-state public university versus a private college or university. Also consider if your child can attend a local community college for two years and then transfer to a larger university. Finally, take into consideration your child's qualifications and eligibility for financial support from colleges and universities (many are now needs blind) and the best way to achieve these objectives. Work with a qualified financial advisor to set up a comprehensive financial plan that allows you to start setting money aside for college based on how much you are reasonably able to contribute without negatively impacting your own retirement and the options available to you to start setting aside funds specifically for your child's higher education expenses.
Start saving early
Small amounts add up over time, and it’s never too soon to start. The earlier you set aside money, the more you can take advantage of the power of compounding. To the best of your ability, stay consistent. Sometimes life gets in the way, but regularly revisiting your financial plan for education can help you stay on track. If possible, set up recurring transfers from your checking or savings account to a college savings account so it’s one less thing to think about.
Find the right vehicles for you
The most common savings vehicle for college is a 529 education savings plan. 529 plans allow you to put after‐tax money into an investment account on behalf of a designated beneficiary, usually a child or grandchild (though it could be a niece, nephew or even a non‐family member). With a 529 plan, withdrawals are tax free for qualified education expenses and money can be used for graduate school or even transferred to a sibling.
Since 529 plans are state sponsored, every state has a different plan with varying investment options. You must choose the investment options offered by the 529 plan and you can only reallocate investments twice a year. Contributions to a 529 plan are not federally tax deductible but contributions may be tax deductible in some states (other states may offer a tax credit). And remember that you don’t have to live in a state to take advantage of their 529 plan.
Aside from a 529 plan, there are other options that may be best for your family. With a custodial account, also called a Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA), contributions can be used for more than just education. But assets must be transferred to the child when the child reaches a certain age dictated by the state - a potential downside if you’re concerned your child may not be responsible enough to manage the account.
Coverdell Education Savings Accounts (ESAs) are tax-advantaged vehicles that work similarly to 529 plans because distributions for qualified education expenses are tax free. However, contributions are limited to $2,000 per year (an amount that may be reduced further based on income).
A Prepaid Tuition Plan is a type of 529 plan usually only offered to state residents where money is set aside for one specific college at today's rates. Amounts can be shifted to another university but may be subject to penalties.
Don’t underestimate the power of family
When a family member asks what your child needs for an upcoming birthday or celebration, such as a Sweet 16 or Bar or Bat Mitzvah, direct them to contribute to your college savings plan. Do the same if you get an unexpected windfall from a generous or deceased relative.
A wealthier family member can set up an irrevocable trust for your child. Assets that may be taxable but will be overseen by a trustee to make sure the funds support a college education. Any money left over after college can go to that child later down the road.
Research federal resources
Even after years of saving, you may still benefit from additional help. The federal government sometimes offers income-based, or scholarship-based, financial support. There may be college specific resources at the financial aid office. Also, many local groups and organizations often have small scholarships. Visit the vast number of online scholarship and grant resources and websites available as your child gets closer to college age so both you, and your child, get that last financial push over the finish line.
1 You can open a 529 account before a child is born and designate the child as the beneficiary. To open a 529 plan before a child’s birth, a parent can name themselves, or another relative, as the beneficiary. Then, once the baby is born and gets their own social security number, the parent can make the child the beneficiary. 529 plans allow the account owner to change the beneficiary to a family member, which in this case would be the newborn child. For informational purposes only. TD Bank and its affiliates do not provide legal, tax or accounting advice.
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We hope you found this helpful. This article is for informational purposes only and is based on information available as of June 2024 and is subject to change. This content is not intended to be used or acted upon with respect to any client's specific circumstances. For specific advice about your unique circumstances, consider talking with your qualified professionals.
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