Considering College?
Recently, I had a meeting with a young couple in their 30s. The discussion started with a question, “Should they be saving money for college for their 2 children?” This is an incredibly good question. I proceeded to answer their question with a return question, “Would it be important to you to provide this leg up to their kids’ long term financial futures?” As a father and family man, I do understand that as parents, we all wish to do everything we can to make life better for our kids. Annual costs of college rise at about 7% per year; that means that every 10 years the cost of a 4-year degree will double. So, planning for this expensive time in life would be valuable. Let’s touch on some options more popularly considered.
Roth IRAs: Personally, I am a fan of this. I have described a ROTH as a savings vehicle that is a “me-first, them-second” investment. Meaning, if the kids don’t need the money, or don’t attend college, then you have not saved for years in a college fund that now has no purpose. Of course, a ROTH’s primary purpose is for tax free retirement savings, but if “Junior” needs some assistance with college, funds from your ROTH IRA will aide in the most tax efficient method.
529 Plans: Offering Tax-deferred growth and tax-free distributions to pay for educational expenses. Does have potential to negatively affect financial aid qualification as it is an asset in the child’s ownership.
UTMA/UGMA (Uniform Transfers/Gift to Minors Account): Excellent custodial account for parents seeking a savings method because taxable gains would be reported to the child’s tax bracket. Also, there is no IRS penalties or requirements that the funds need to be used for education. Scholarship? Then, this can be used for their first home, or maybe the car they buy to get to school or work.
Permanent Life Insurance: Although, many think of this for its primary purpose, to provide tax-free benefit at one’s death, cash value built up in a life insurance policy is not considered an asset for financial aid qualification. The loans/withdrawals from permanent life insurance will be tax-free allowing you to retain the importance of end-of-life benefits and pay down the tuition burden.
Student Loans/Grants: Whether they are subsidized or unsubsidized, student loans are not a foreign language to many. Though, it may be nice to limit this as a primary source to pay for your education, it is still an option. Upon application though a FAFSA form, students will be rewarded assistance for tuition/room and board, with consideration to household income and net worth, of course.
Scholarships: Whether it be by athletics, arts, or academics, a scholarship to help with college is ideal. Only about 2% of high school students earn athletic scholarships, and often even the Valedictorian must pay for room and board.
There are many ways to plan for this future event. Of course, I advise starting a savings plan as soon as you can. This planning process will help to assure your loved ones the excitement of that collegiate acceptance letter.