5 Things To Think About When Planning To Pay For College

Are you worried about how you're going to pay for your child's college education? Don't worry, you're not alone. In this week's Inside Look at Building Towards Wealth, we'll be discussing five things you need to think about when investing for college.

1. Start Early – A Long Time Horizon Builds Value

The earlier you start, the more your savings could potentially grow. If your child is more than a couple of years away from entering college, then an investment account is a good option. Remember, the average cost of college in the United States is $35,331 per student per year.

2. Don’t Just Save – 529 Plans Provide Tax and Investment Advantages

529 plans are tax-advantaged savings plans that provide tax and investment advantages. Contributions are not deductible at the federal level, but earnings grow tax-free and there is no federal tax on withdrawals to pay for qualified college expenses. Depending on your state, you may be able to deduct contributions from your state taxes.

If you live in the State of IL, like my wife and I do, you receive a deduction from your state taxes up to the first $20,000 invested per year. That’s a $990 tax savings at today’s current 4.95 % tax rate.

3. Get Your Child Involved: Custodial Accounts Create Commitment

Getting your child involved in the process by setting up a savings or investment account that they can contribute to is a great way to keep them focused on college and teach them some basic financial skills.

The accounts can be used to deposit gifts of cash that the child receives – for instance, birthday or holiday checks from family and friends, and for the child to save his/her own earnings.

4. Shift the Allocation Through the Journey

Your child’s 529 plan allocation should be monitored and reallocated as they progress through high school and the time horizon gets shorter. Your financial advisor can help you make decisions to preserve what you have built up and provide for continuing growth.

5. Got a Late Start or Have a Generous Benefactor?

If you are over the gift tax exclusion and the 529 plan isn’t enough, paying tuition directly to the college or university is always an option. This applies to anyone – not just parents.

Don’t Limit Your Options

Encourage creative thinking, in yourself and your child, instead of a focus on one school or one specialization. Many children are taking their core classes at a less expensive community or local college before finishing their degree at a more expensive college.

When it comes to paying for college, there’s a lot to think about. However, the most important thing is recognizing the need for planning and taking action ahead of time. By laying out your options, weighing the pros and cons, and taking your own financial situation into account, you can begin to build a flexible plan that meets your needs. So, start early, get your child involved, consider a 529 plan, shift the allocation through the journey, and don't limit your options. Remember, being proactive is much less stressful than being reactive, especially when it comes to money and savings.

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