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What You Need to Know about Saving for College

Financial Planning

The cost of college is rising significantly faster than financial aid being offered to incoming college students. This means that many college students and their families are turning to private loans with incredibly high interest rates to help finance their secondary education. This is problematic, and it sets your college student up to carry a significant student debt load into their young adult life after they graduate.

Many parents, and even grandparents, are getting involved by starting to save for their future college student’s education costs early. If this sounds like you, it can help to put a little bit of thought into your savings strategy ahead of time.


Set a Budget

Given how expensive college can be, it’s tempting to throw as much money as humanly possible at saving for your child’s college education. However, like most big-ticket purchases, having a budget can help you to set clear goals for savings and create a plan that helps you achieve those goals. If your kids are still young, you may not be able to sit down with them to discuss what types of colleges they’re interested in.

In that case, it can help to look at colleges near you, or that you think may be a possibility to get a sense for the average cost of tuition, room and board, or books. For example, if your middle schooler is convinced they want to be an educator when they grow up, you might look at public and private schools that have exceptional programs for teachers. Of course, your kids may change their minds about what profession they’re drawn to a thousand times between now and when they graduate college, but it never hurts to take it into consideration early.

If your kids are a little bit older, ask their opinion about colleges. You may be surprised to find they have an opinion already about where they’d like to enroll! Once you have an idea of what types of schools they’re interested in, you can take a look at total annual costs, multiply that annual cost by 4 (or 5, as many students take an extra year to complete coursework), and set your savings goal.Once your savings goal is set, you can reverse engineer using that number to create a saving budget for yourself. How much money do you need to contribute to an earmarked account to reach that goal? What can you adjust in your current budget to make that happen?


Consider Taxes

There are many different ways to save for your child’s college education:

  • A traditional savings account
  • An investment account that doesn’t penalize you for removing funds
  • A 529 plan
In most cases, a 529 plan is your best course of action. 529 plans are investment accounts specifically intended for education-related expenses. You can use them on private school tuition for the K-12 years, or you can use them for college tuition, room and board, books, and any other tools or software required by your child’s program. A 529 plan is funded with after-tax dollars, but it grows tax-free. And the best part? When you withdraw from the account to pay for education-related expenses, you don’t get taxed on any returns on your investment or growth in your funds.


Get Everyone Involved

Whether you’re saving while your kids are still young or you’re getting a later start, it can help to get everyone involved. Requesting that grandparents or other family members and friends make a small contribution to your kid’s 529 plan rather than gifting another toy for birthdays and holidays can be helpful. Every dollar counts toward reaching your goal! While it may not feel as exciting for relatives to donate to a 529 plan, your child will definitely be grateful years from now when they’re able to graduate debt-free.


Don’t Stop When They Head to School

This is the most common mistake that we see parents make when it comes to their college education savings: when their child graduates, packs their bags, and heads off to college in the fall they stop saving. It feels like that “to do” has been checked off your list, but that couldn’t be farther from the truth. This is especially important if you haven’t hit your total savings goal yet. However, even if you’re in the ballpark of having “enough” saved, it doesn’t hurt to put a little bit more away. You never know when additional expenses could crop up, or whether or not your child might need an extra year to study. If you oversave, you can do a few different things with the leftover funds:

  • Transfer the money to another beneficiary - like your other kids who haven’t attended college yet or are in the middle of their time at school
  • Use the funds for the next generation
  • If you have no other education-related expenses for your 529 plan funds, you can always withdraw the money - but you will be subjected to income taxes on the earnings as well as a 10% penalty

Need help with saving for your kid’s college education? Let us help! At Michael Brady & Co, we work with many of our clients to create a plan for college education savings, and we’d love to help you tailor a strategy to your unique needs.