Friday, May 13, 2016

Strategies to Saving for a College Education

For most parents, a big priority is trying to make sure that their children succeed in life. Parents want their kids to lead an easier life than they had, and most of them see education, especially a college degree, as the main path to that goal. Unfortunately, families have all kinds of financial demands that often take precedence over college, which can be years down the line. Chris Hiestand, in his L.A. Times article, discusses a few potential strategies to help struggling parents maintain their financial stability while still putting money away for future college costs.

A 529 savings plan is one such method to contribute to future expenses. Most savings plans, including the 529, involve the contribution of after-tax dollars to an account, where the money grows in interest and can be withdrawn, tax-free, to pay for educational expenses. Additionally, $14,000 per year can be given between parties as a tax-free gift. Anything above $14,000 is subject to gift taxes. The best thing about tax-free gifts is that they can be front-loaded up to five years in advance. In other words, a parent can put $70,000 into a 529 account one year, but then won't be able to contribute to the account for the next five years. This can often be better than contributing once per year because it gives the money more time to accrue interest, and since you use after-tax dollars, the contributions can be withdrawn tax-free.

Another option is using a Roth IRA to save for college and retirement at the same time. Once again, Roth IRA contributions are made with after-tax dollars, which means the contributions can be withdrawn without additional taxes or penalties. The Roth IRA is often better than a 529 plan for several reasons. Firstly, the 529 is based on a specific interest rate, while the Roth IRA gives you more flexibility to choose investments and decide how much money is being invested. Additionally, if your child doesn't end up going to college, the money in the Roth IRA fund can still be put toward retirement. Finally, perhaps the greatest advantage, is that the money in a Roth IRA does not count against financial aid while a 529 held by a parent will.

Often, there is no way to pay for college without taking out loans. However, there are smarter ways to get the best bang for your buck in loans. Over 70% of bachelor's degree recipients graduate with debt, and although getting a degree is an investment in the future, the returns on investment can be slow. Some loans allow students and their parents to push off interest and payments until 6 months after graduation, but when the interest finally begins to accrue, it can be at rates of 9% or higher. Many parents decide that it makes more sense refinance their mortgage and use the saved money each month to contribute to schooling. Others tap into their home's equity to pay tuition and fees.

In all, getting a college education is possible. Through a combination of saving, financial aid, and smart loans, a college degree can be affordable to some extent. Smart financial planning can be hard, but in general, getting a college degree is a good investment in yourself or your children, and should pay off in the long run. Financial stress today could be worth it if it means business success in the future.

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