4 Ways to Catch Up on College SavingsSubmitted by Castlebar Asset Management on October 23rd, 2017
What happens when you realize college is right around the corner for your teenager -- but you haven’t been saving to cover the hefty price tag?
The cost of college has been a financial issue most families grapple with at some point or another. And with no sign of college tuition going down in the future, a degree is becoming increasingly difficult to afford.
First thing’s first: don’t beat yourself up over it. You can’t change the past. What you can do is take action right now so you can start to catch up on college savings.
Here are 4 ways to make it happen, even if your kids are only a couple years away from heading off to a university.
1. Cut Expenses Now
Cutting your expenses while your teenager is in high school can help you put more money towards their college savings right away.
Not to mention, tightening up your budget and prioritizing your savings provides a great real-life financial lesson to your kids. Look at this not as a limitation on your life, but as an opportunity to teach about the importance of sticking to a spending plan to help achieve a greater goal.
You don’t need to completely change your lifestyle to cut spending, either. Instead of depriving yourself, look for cheaper (or even free) alternatives to activities you already enjoy or services you use. Even small expenses that you trim or eliminate will make a positive impact in the long run.
You can also look at what costs you can cut just for the short-term. If you usually take a family vacation that costs $5,000 for everyone, skip it this year and put that money toward college savings.
If your kids are just a few years out for college, that only means skipping a handful of trips (or, again, looking for cheaper alternatives for now). Even changes you view as sacrifices might be easier to make if you know it’s a short-term adjustment to help your kids get into higher education.
2. Maximize Your Use of Tax-Advantaged College Savings Accounts
Once you start finding money to save, you need to know where to put it that will make the most of those savings in a short amount of time. Get the most from that money by maximizing the tax advantages of select college savings accounts.
These include college education savings vehicles like 529 plans. 529 savings plans offer major tax advantages, and are sponsored by individual states or educational institutions. You have a lot of options here, since you don’t necessarily need to use the 529 plan offered by your state.
There are also two types of 529s to decide between:
College savings plan: You can create an account designating your college-bound child as the beneficiary.
When you contribute your college savings to a 529, you can then invest that money into available funds. Any earnings you gain from your investments can be used on qualifying education expenses -- and when they are, those earnings are free from income taxes.
Because of this, 529 plans can help you make the most of the money you saved for college because A. it has a chance to earn a return by being invested and B. those gains are yours to keep, since you won’t need to pay taxes on them so long as they go toward qualifying expenses.
Prepaid tuition plan: If your teen is dead-set on a particular school, a prepaid plan might make sense.
This allows you to make payments towards a specific college in advance of your student attending. Some plans let you purchase education credits, while others allow you to put funds toward room and board.
The advantage here is that you can essentially pay for a chosen school now at today’s rates, and avoid the rising cost of college that might make school even more expensive when your teen finally arrives.
The downside? Your options are more limited if your teen changes their mind at the last minute and wants to go to a different school. Prepaid plans are also state-specific, and can be at the mercy of changes in state budgets and policy changes.
If you’re overwhelmed by the choices, talk to your fee-only financial planner. They can help you evaluate the best choice to make if you want to use a 529 plan -- or if you want to explore other options.
Just because a 529 plan is the most traditional college savings vehicle doesn't mean it’s the only one available.
3. Think Outside The Box to Find Funds for College Savings
There are multiple savings accounts that could potentially boost your college-saving efforts along with a 529 plan (or instead of one).
Here are some alternatives to consider:
- High-yield savings accounts or CDs
- Coverdell ESAs
- Brokerage accounts or certain retirement accounts
A Roth IRA, for example, can help you enjoy returns on your investments with lower fees than you could through a 529 plan. Roths also provide more options for where you invest, since they’re not limited to the funds provided by the plan.
You can withdraw contributions and earnings without penalty if you use those funds on qualifying education expenses, too.
That doesn't mean drain your Roth IRA that’s earmarked for retirement. Your future financial security should always remain a priority -- yes, even over saving for college.
That’s because you don’t have to pay for university expenses on your own.
4. Share the Responsibility to Catch Up on College Savings Faster
As parents, you don’t need to shoulder all of the stress and responsibility of saving for your kid’s college.
There are several ways your teens can help contribute to their own college savings funds. Encouraging them to take these steps is part of helping them make the transition from high school student to college-aged adult.
- Get a summer job. Part or all of what they make here can be contributed to a college savings fund set up by you or them. (They can also work part-time in college to help generate their own spending money or to pay for books, room and board, and other miscellaneous costs.)
- Ask for contributions as gifts. Do they really need another sweater from Grandma this holiday season? Instead of traditional gifts for birthdays and holidays, have your teen ask for contributions to their 529 plan, or for cash gifts.
- Apply for scholarships or grants. Working hard in high school, either at a sport or in academics, can literally pay off with funding for college expenses.
- Get smart about picking a school. A name-brand, well-known school may sound appealing -- but it’s likely to be much more expensive than lesser-known or smaller schools. It’s more important to consider the specific programs offered rather than choosing based on name recognition.
Student loans are also an option. While you may not want to saddle your kids with debt so early in the game, small and reasonable loans can be useful if they help your student get through college -- and prevent you from raiding your savings to pay for it.
Again, talk to a financial planner who works as your fiduciary to determine what amount of student loan debt might be acceptable for your student to take on and plan to repay once they graduate and earn their own income.
Saving for college late in the game might feel overwhelming, but you have a wide range of choices. Regardless of the amount you help to save, remember you aren't the only one in charge of financing their education.
Every small contribution you and your teen make helps.
Andrew Comstock, CFA
Please contact me at 913-660-0708 or by email to discuss your financial planning and investment management needs. You can sign up for our monthly newsletter here. Follow me on Twitter @CastlebarAM.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.