Three tips to maximize college savings
by Jill ErpsMs. Erps is Senior Vice President – Chief Retail Officer at Financial Partners Credit Union. She leads the organization’s retail groups including insurance and wealth management services. Visit fpcu.org
On the heels of College Savings Month, September may seem like an odd time to start thinking about college savings. But back-to-school time is the wakeup call most parents need to get serious about planning for their child’s higher education. Reportedly, more than 90 percent of parents of high-school-aged children start thinking about affording higher education during this time of year.
As financial professionals, we are focused on optimizing savings, while trying to meet the goals of each of our members or customers. We understand that saving for a child’s college education is important. However, we also know that it shouldn’t come at the expense of any nest egg parents have established. How can we help clients save for college while still ensuring that they take care of themselves?
With priorities like paying the mortgage and saving for retirement, planning for college savings can seem daunting. While scholarships and grants are options to help afford college, the application process happens closer to college-age, so that option alone introduces risk in the college savings plan.
Starting early and saving a small amount each year in a college savings account can make a huge difference in the long run – studies show that families with a college savings plan end up with 30% less student loan debt than those who didn’t plan in advance.
The New Realities of Tuition Debt
Presently, the data indicates that the average student loan debt for college graduates is over $35,000. Starting a college fund early can help keep debt manageable upon graduation, while allowing mom and dad to continue to save for their own retirement.
Here are some basics to keep in mind when you are helping clients plan for college savings:
- Set a Goal: Talk to the student and parent about where they are planning on attending college or university. Part of limiting the cost of college is to make wise choices about where to go to school and where the student will be living. As an example, the average tuition for private colleges is about $40,000 per year while the average in-state tuition at a public college is only about $11,000. When setting a savings goal, use national averages as a baseline.
You may suggest to your client that they may want to consider other lifestyle choices that will limit the cost of college overall. Can the student attend a community college before going to a 4-year university? Can the student live at home and commute to class? Based on The College Board Trends in College Pricing of 2017, students and families can save up to $30,000 over the course of their 4-year education by first attending a community college.
If your member or client is expecting to take out student loans for their child (either federal or private), you may want to ask them to consider borrowing no more than they are expecting their child’s starting salary to be their first year out of college. Let your members know that since the 2010-11 school year, the total amount of federal aid has declined annually. The younger the child who is considering higher education, the more prudent it will be to look elsewhere for available funding and start saving now.
- Take Advantage of Tax-Free College Savings Accounts: Coverdell Education Savings accounts and 529 Plans offer tax credits or are free from income taxes. Saving just $50 a month in an account that earns, on the low end, 2% interest adds up to more than $15,000 over 18 years. Ask your client to set an amount they can afford comfortably, and have the money automatically transferred into the college savings account each month. When you help your member or client make savings easy, it will be a habit they will continue beyond the time they spend in your office.
Saving for college over a child’s growing years is also a much less expensive finance-option. In fact, Savingforcollege.com states that if the child is a newborn, it will cost the client $195,891 more to borrow for a college education than to save for college.
When starting a 529 plan for your client, be mindful of the rules that could limit their use of the funds. For example, 529 plans are state sponsored plans; however, a client can choose which state’s plan to invest in, they do not have to use the 529 plan of the state where they are currently living. So, advise your clients to shop around for the best 529 plan that fits their needs. The only exception to the comparison shopping is a type of 529 plan called a prepaid plan. As the name implies, the plan offers the client a chance to prepay for tuition at a public school in that specific state at a locked in rate. A prepaid plan only works if the child is going to attend an in-state, public school.
The other type of an account that you may suggest to clients who are trying to save is a Coverdell Education Saving account (ESA). With a Coverdell ESA there is a contribution limit of $2,000 per child per year and once the child reaches the age of 18 tax law prohibits any more contributions to the account. However, a Coverdell ESA does allow funds to be pulled from the account to cover education related expenses in K-12.
- Invite Others to Contribute: Your client may not know that anyone can contribute to a 529 plan. They can let their family members, like grandparents, know about the accounts so they can also help by adding contributions. If these relatives routinely give cash gifts to the children for holidays and birthdays, suggest to your member or client to ask family members to send the money to the college fund instead. This alone can add tens of thousands of dollars to savings over the years!
The Coverdell ESA allows parents, grandparents, or any other person to open an ESA as long as they have a person under the age of 18 as the beneficiary. The person who is establishing the ESA must have an income less than $190,000 in modified adjusted gross income ($95,000 for single filers) Again, with the Coverdell ESA there is a contribution limit. Ask clients to communicate with family members about the levels of contributions in the child’s name; there is a tax penalty for any contributions that exceed the $2,000 limit.
As financial professionals, we know that each family’s college savings plan is unique and it is up to us to help find a way forward that not only meets the needs of every member that comes through our doors but allows them to feel comfortable and secure in their savings plan.