Vincenza Vicari-Bentley, AFC
You may have a lot of financial goals that could include paying off debt, saving for emergencies, buying a home and investing for retirement. How is it possible to also save for our kid’s college? My parents didn’t save any money for me to go to college and I ended up with a lot of student debt. In this post, I’ll discuss ways you can save with the ultimate goal being to minimize student loan debt.
Just like saving for retirement, the earlier you can begin to save the better. Money.com says that every dollar saved ahead of time can save you $2 in debt payments after graduation! Most financial experts will say it’s not a good idea to sacrifice your own retirement savings in order to save for college. After all, you can finance a college education but you can't borrow for your retirement. That being said, if you’re determined to help save for your kid’s college (like me), you can get a tax break from a college savings account.
A rule of thumb given by many financial advisors is to plan on saving at least one third of the cost. The remaining two-thirds can be filled in by scholarships, financial aid and current income (e.g., your income or student’s work-study). Of course the amount you decide to save will ultimately depend on your family income and expenses.
Coverdell Education Savings Account (a.k.a ESA) takes advantage of tax-free withdrawals to pay for qualified higher education expenses and also K-12 expenses. Maximum contribution currently allowed is $2,000 a year.
529 Plan is for qualified higher education expenses and up to $10,000 per year in K-12 tuition and tax free withdrawals. Some states offer additional state tax benefits. No annual contribution limits but you must pay federal “gift tax” if you contribute more than $15,000/year.
The UGMA (Uniform Gift to Minor’s Act) and UTMA (Uniform Transfer to Minor’s Act) Accounts used to hold and protect assets for a minor until they reach the age of majority in their state (18, 21or 25). These accounts are extremely flexible. This could be an option to consider if you’re not sure if the child will go to college because these funds can be used for anything. Contributions are not tax-deductible, no annual contribution limits, but there is the gift tax if you put more than $15,000/year.
A Regular Savings Account or Certificate of Deposit -this can be a complement for a 529 or ESA to cover other college expenses as not all costs qualify as an “educational expense” (e.g. transportation, boarding, student health insurance).
There are a lot of great resources out there to research and find what is best for you. A great place to start is www.savingforcollege.com. If you’re ready to start saving, consider saving 5% of your income. You can always adjust that number for your budget and you can always contribute larger lump sums if you have extra funds available in the future!
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