Recent observation: Parents start worrying about paying for their children’s higher education when they are in middle school or beyond. Although there are still options at that time, ideally the best time to start is when they are infants. The more time you have, the better you and other loved ones can prepare for college costs. Maybe you will be able to pay expenses out of regular household cash flow while your child is in school, but the reality is most cannot, and many have postponed saving until their child has begun or nearly begun their higher education. Additional years of saving, even with smaller contributions, can make a significant difference in the monies available to buffer the gap between costs and resources.
There are attractive tax-advantaged college savings options that offer ease and flexibility. One option allows you to contribute as little as $50 per month to $250,000 per beneficiary. These funds will grow tax-free as long as the money, when withdrawn, is used for college costs. Additional advantages are that anyone can add to your account — perhaps as gifts to your child for birthdays and holidays — which will aid your efforts to save, and provides no income limitations on this account, so you’re able to contribute whether or not you have earned income, and a high contribution maximum.
Each state sponsors their own college savings account but that doesn’t necessarily mean yours offers the best option. Make yourself aware of the comparisons. Your state’s plan could qualify you for a state deduction but if the accounts’ costs are higher and its performance track record not up to par, are you really ahead? If you decide to use another state’s sponsored program, it doesn’t mean that your child can only attend a school located in that state; your child can choose any qualified institution.
A Coverdell Educational Savings Account (ESA), formerly known as Educational IRAs, is another option which allows you to build savings on a tax-free basis. Be aware of contribution limitations of $2,000 per year as well as income limits.
If your child needs to take a loan, keep in mind it is usually more advantageous for your student to take out student loans versus parent loans. First, the student can later deduct the interest whereas the parent can’t. Secondly, this helps your child begin establishing a credit history. Parents will still have the flexibility to help pay towards the loan. This simply buys time if the funds aren’t readily available.
When your child nears high school age, begin ongoing conversations around the game plan to pay college expenses, whether or not you can help financially and to what extent. This will impact where they are headed and provide time for them to search and get creative with funding options as well as encourage them to put forth the effort to obtain scholarships and grants that may be available with some hard effort put into their school work.
Please call Ed or me, if we can assist you or someone you know!