Paying for College

Deborah Helton

Deborah Helton

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While many advisers believe that saving for your retirement should be the number one financial goal, a child’s education continues to steal financial focus of parents. Numerous surveys have revealed that between 68 and 85 percent of parents hold education as a first or second saving priority, beating out other significant events including emergency savings and retirement funds. With the national discussion and concern over the earning gap between those with and without college degrees coupled with the rising cost of higher education, it is easy to see how the focus can be shifted to saving for your child’s college education.

The average price tag for a moderate college budget to attend an in-state public college for the 2013-2014 academic year averaged $22,826, according to the College Board’s recent study. This budget encompasses tuition and fees, books, housing, meals, supplies and other items including transportation costs.

Creating a financial goal is remarkably easy. Current tools allow you to pinpoint a school and, based on the age of your child, will return a saving goal to get you started. Once you have a goal in place, the popular mechanisms for saving varies widely: 38 percent of people save through regular savings accounts, while 23 percent utilize 529 plans and only 5 percent utilize Coverdell accounts, according to the EARN Research Institute. So, what is your best savings tool?

Regular Savings/Investment Accounts:  With the price of tuition rising faster than inflation, a portfolio tilted toward stocks may help you keep up with your goals.  As your child grows, you can reduce the exposure and risk in these accounts by switching to more conservative investment alternatives in the market; however, this alternative will be taxed as you go, hindering your growth with annual tax payments.

529 Plans:  A 529 Plan is an education savings strategy operated by a state. Two are available in Colorado: Scholars Choice and College Invest. The plan is designed to help families set aside money for college, growing tax-free.  In addition to tax-free growth, parents or other contributors to the plan are able to take a Colorado state tax deduction for dollars contributed into the plan.  Money in the plan can be used to meet the costs of qualified colleges nationwide, regardless of the state the plan originated. Investment options inside the 529 plan can be limited to more conservative or age-based portfolios.  Penalties do apply if funds are removed for purposes other than college education or specific related expenses.

Coverdell Accounts:  Similarly, a Coverdell account is an Education Savings Account, which includes higher education. The total contributions to this account cannot be more than $2,000 in any year and the beneficiary of the funds must be under 18 or have special needs.  Although contributions aren’t deductible, deposits grow tax-free.

Roth IRAs:  A less thought of alternative for college savings is a ROTH IRA.  If your child has earned income, this might be another opportunity to save for college.  The benefits of the 529 are built in with tax deferred savings along with the investment freedom of a traditional investment account.  Annual contribution limits in 2014 for a ROTH account are the lessor of $5,500 or earned income.  If your student has a part-time job, maybe working for their entrepreneurial parent, they can contribute to a ROTH account.  Distributions from a ROTH are tax-free if used for college, a first home or retirement above age 59 ½.

Start Today:  Even modest savings can pack a punch if you start early.  Investing just $100 a month for 18 years will grow into $35,500 with an assumed rate of return of 5 percent. It is never too late to start saving, but the earlier parents start, the better off they will be in the long term.

Bridge the GAP with  Scholarships, Grants and Loans :  College scholarships and grants are readily available to students willing to do the research and pay attention to regulations.  Many program sponsors set their own rules about who can apply to specific scholarships, so meeting eligibility criteria is key to receiving awards.  Subscribe to online accounts to help you sort through the scholarships and find ones that meet your student’s needs. Some resources include scholarships.com or fastweb.com.  Ensure your student completes the general scholarship application at his or her college of choice as well.  Government assistance through grants and some scholarship matching also occurs by completing the FAFSA form or Free Application for Federal Student Aid.  Filing your federal income tax return and FASFA application early will increase your student’s chances of being matched with financial aid. Finally, college loan applications are more lenient than other loans and offer lower interest rates than the market.  Loans can help fill in the financial needs. Knowing the difference between subsidized loans and unsubsidized loans is very important. Subsidized are best as interest on the loan is paid by the US Department of Education for up to six months after you leave school. On the other hand, unsubsidized loans accrue interest from the day the loan is borrowed.

Tax Breaks:  The American Opportunity Credit, Lifetime Learning Credit and Hope Credit are all Federal tax credits that can be claimed for college expenses.   These credits can be paired with other strategies like the 529 or Coverdell as long as the same expenses aren’t utilized for both benefits.  Depending on your tax situation, there are a number of strategies in deducting this credit or utilizing the tuition and fees deduction in order to offset the overall cost of college.  These credits or deduction are applicable on the first $4,000 of expenses each year.

Many people incorrectly assume that having savings set aside for college will affect their ability to obtain traditional financial aid.  This myth should be ignored.  Meet with your financial advisor or CPA to discuss what option or blend of options may be best for you.  To manage risks, parents should periodically review their investment choices for college savings to ensure choices still meet their needs.

 For more information, contact Deborah Helton, CPA at 719-579-9090.