Strategies for Saving and Paying for College

September is here, and high school seniors are beginning their college applications. An exciting time, but also a stressful one for students and their families. So, let's dig into this nuanced topic of college planning.

Whether you're a parent of young children or have a student starting the application process right now, there’s something here for you!

Tax Efficient Ways to Save for College

Many parents wish to financially support their child’s college education, using either savings or cash flow. A tax efficient way to save is taking advantage of 529 Plans, especially if you have young children.

529 Plans are tax-advantaged savings accounts that grow tax-deferred and allow tax-free withdrawals for qualified educational expenses like tuition. Some states, including Arkansas, offer tax deductions on the contributions.

Key Points about 529 Plans:

• Giving Unused 529 Funds to Siblings: You can transfer funds to another child if the original beneficiary does not use all the funds (e.g. gets a scholarship.)
• Converting Unused 529 Funds to a ROTH IRA: Unused funds can be converted to a ROTH IRA for the child, a new option under the Secure Act.
• No Need to Settle for Your State's 529 Plan: You don’t have to use your home state’s 529 plan; compare options for better investment choices and lower fees.

Tip: If you have young children now is a great time to start saving into a 529 Plan, even if it’s a small amount. This maximizes tax benefits, investment growth potential and allows for adjustments later.

Paying with Cash Flow is another common option for high earners. Many Walmart and Sam's Club Leaders allocate a portion of their MIP or equity payouts to cover college expenses.

Tip: If you are contributing a portion of MIP to the Walmart DCMP, earmark your equity payouts to pay for college expenses. If possible, you do not want to miss out on the tax-deferral benefits of the Walmart DCMP.

If you have questions on building a College Savings strategy - such as how much to contribute or which 529 Plans make sense for you - feel free to send me a message, I'm happy to answer these types of questions.

Don't Count Out Scholarships

Even the children of high earners can benefit from scholarships, which come in two types: Need-Based and Merit-Based. While Need-Based scholarships may be challenging for high earners to qualify for, many schools offer generous Merit-Based scholarships regardless of income and wealth.

Here are some examples of attractive scholarships that are completely based on merit.

• University of Alabama: The Foundation in Excellence Scholarship of $15,000 per year is awarded to students with a 3.5 GPA and 29 ACT.
• University of Missouri: Mark Twain Level 2 Scholarship of $8,500 per year is awarded to students with a 3.5 GPA and 29 ACT.
• University of Oklahoma: The Distinguished Scholar Scholarship of $14,000 per year is awarded to students with a 3.5 GPA and 29 ACT.

Tips: It is important to be a smart shopper! Apply to your target schools but also apply to similar colleges even if you have no desire to attend. If a non-target school offers more scholarship funds than your target, you will have a strong case to request more funds from the desired college.

Some Loans Make Sense, Even if You Don't "Need" Them

There are three types of loans available to students, but only one is generally recommended and that is the Federal Direct Stafford Loan. Here is why.

Unsubsidized Federal Direct Stafford Loans have low, fixed interest rates and are available to high earners. However, the maximum loan allowed under these terms is $27,000 over 4 years. Even with this limitation, it can still free up cash flow to allow you (the parent) to invest in your retirement accounts or cover an upcoming expense. Bonus: Having a student sign a promissory note every year instills some responsibility and ownership over their education.

Federal Direct Parent Plus Loans and Private Student Loans are best avoided, if possible, due to their high fees and interest rates.

Wrap-Up

Planning for college can be daunting, but there are several financial strategies to help manage it. Many families and students use a mix of savings, cash flow, scholarships, and loans to cover this major investment. The goal is to ensure the student achieves a valuable return on this investment, both financially and personally.

Thanks for reading,

Mark Chisenhall, CFA, MBA

Taurus Financial Planning

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm specializes in providing tax-efficient financial planning and investment management for Walmart and Sam's Club Leaders.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.