Back to School Financial Checkup
It’s back to school time around the country. For those of us who are trying to save for college and for their child’s education, it is a good time to review where we are at and if any adjustments are needed. Here are a few steps parents and students can take.
Revisiting Education Savings Plans
This is a good time to review your educational savings efforts to be sure that you are on track to accumulate what will be needed for your children’s anticipated educational needs.
A common educational savings vehicle is a 529 plan. These accounts allow money contributed to the plan to grow tax-free if ultimately used for college, other post-secondary education programs or in some cases K-12 educational expenses.
These plans are offered at the state level, and in some states there might be a break on state income taxes for state residents who contribute to the 529 plan for their state. Typically, 529 plans offer a menu of mutual funds that can be used to invest the money in the account for the benefit of the account’s beneficiary.
Recent changes in the rules have made 529 plans even more attractive. Under the Secure 2.0 rules, money left in a 529 plan that is not used by the account beneficiary can be transferred to a Roth IRA in the beneficiary’s name. The lifetime limit on this is $35,000. This can provide the account beneficiary with a nice jump start on their retirement savings journey.
Budgeting for Education Expenses
It is important to try to put together a budget for educational expenses. These could include:
These expenses are among those generally considered to be qualified educational expenses.
It is important to estimate what you will need for your child’s higher educational costs. This estimate may vary widely if they are considering both public and private colleges and universities.
It also pays to explore all types of financial aid options as well. Some aid is need-based, while other types of aid are merit-based and are dependent on the students’ academic merit. It is important to make sure that once the student is at the point of applying to colleges, they complete the FAFSA federal financial aid form each year. This is the starting point for most types of financial aid, including federal student loans. Note that there were some changes in the FAFSA process that went into effect for the 2024-2025 school year that caused major problems for many completing the form.
Impact of Student Loans
Federal student loan rates for the 2024-2025 school year are at the highest levels in over a decade. The interest rate on federal student loans is 6.53% for the current school year. This is for undergraduate student loans.
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The rate for graduate school loans is 8.08%, which is up from 7.03% for the prior school year. Plus loans for grad students will have an interest rate of 9.08%, up from 8.05% for the prior school year.1
These higher rates fly in the face of the efforts of the Biden administration to lessen the impact of student loans on borrowers through various repayment relief programs which have mostly expired. The current rates are based in part on the May auction rates for the 10-year Treasury note.
These loan rates apply to new loan money disbursed after July 1 of this year. Money borrowed in past years will be charged the interest rate in effect at the time. An alternative to federal student loans are private student loans. Unfortunately, these rates are often higher than the federal loan rates.
As far as managing student loan debt there are some options. Certainly, the student loan forgiveness programs that recently expired were a great help to many borrowers. Be on the lookout for any similar types of programs in the future. Note there are still a number of forgiveness programs in place, though most pertain to borrowers who have gone into service professions such as teaching and nursing. There are also programs at the state level and some that pertain to members of the military.
For graduates and parents, it is important to have a repayment plan. Be sure to work these payments into your post-college budget. Also beware of scams as there are many under guise of student loan consolidation and similar monikers.
Need help planning for a current or future college student’s college costs? Contact your Wedbush financial advisor?or registered representative?for help in?assessing if?a college savings program?is right for you?and for overall advice on meeting this important, but high expense for your kids.
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Disclosure
Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Contributions to a 529 plan offered by a non-resident state should consider before investing whether the client or designated beneficiary(s) home state offers any state tax benefits only available in the resident state program.