If you are anything like us, you have burning questions that you want answered. That’s what the Ask the Expert series is all about – it’s a chance to get questions answered by local experts.
Today, we’re turning to our friend Ruth Ahnen with Modern Woodmen of America. She is answering a question that many of us have – how can we manage to save for our kids’ college education? (Spoiler: Start now – even if your kids are still young.)
College is an investment in your child’s future that more than pays for itself … eventually. Until that time, it can be a major expense that strains a family’s budget.
According to The College Board, average published tuition and fees for full-time, in-state students at public four-year colleges rose to $9,650 in the 2016-2017 school year. Those costs increase considerably for out-of-state and private institutions.
So what’s the best way to manage education costs? Here are a few planning pointers.
Saving some is better than saving none.
With today’s college costs, saving the entire amount your child will need may be unrealistic. Avoid using this as an excuse to not save at all.
Modern Woodmen recommends families start saving as early as possible. This will allow them to benefit from the compounding of interest over time.
Saving costs less than borrowing.
Some parents fear saving for college hurts their child’s chances for scholarships and financial aid. The truth is most scholarships are merit based. While grants are available (and you should definitely check into them), financial aid for many kids means getting a loan.
Any amount saved is that much less your child will need to borrow. Plus, the loan likely costs more in the long run. Consider this scenario.
Option 1: Save $25,000 for college expenses.
- Assuming a 10-year time frame and a 6 percent average annual return, your monthly investment would need to be $152.
- The total amount invested would be $18,240.
Option 2: Borrow $25,000 for college expenses.
- Assuming a 10-year repayment period and a 6 percent interest rate, the monthly student loan bill would be $278.
- The total amount repaid would be $33,360. Borrowing could cost $15,120 more. (1)
There are many different ways to save.
You have a variety of options. Two plans specifically designed to encourage saving for future college costs are 529 plans and Coverdell education savings accounts. Both offer tax advantages.
- You can contribute a larger amount of money to a 529 plan. Some plans have contribution limits of $200,000 or more. (2) With Coverdell ESAs, you’re limited to $2,000 per year. Additionally, your ability to make a contribution is determined by the amount of your modified adjusted gross income.
- Money saved in 529 plans must be used for higher education expenses. You can use qualifying withdrawals from a Coverdell ESA for education expenses that occur before college, such as the cost to attend a private high school.
You can save for retirement and college with one plan.
You don’t have to choose between college and retirement savings goals. A Roth IRA can help you achieve both goals simultaneously. For families that qualify, consider fully funding Roth IRAs for both parents.
- It allows your family to save up to $11,000 ($5,500 for each parent under age 50) per year. Parents over age 50 can save up to $6,500 each per year.
- You can withdraw part or all of these contributions to pay for college without income tax consequences or penalties from the IRS. Your earnings can remain for retirement.
- If you’re over age 59 1⁄2 and have held a Roth IRA for at least five years, you can withdraw your earnings as well without income tax consequences. (Note: If you’re younger than 59 1⁄2, the 10 percent penalty from the IRS does not apply on earnings you withdraw for qualified college expenses. However, your earnings will be subject to ordinary income taxes.)
- Parents maintain control over the funds.
- A Roth IRA (like other retirement accounts and life insurance) is an exempt asset on the Free Application for Federal Student Aid (FAFSA) application.
- If your child doesn’t need the funds for education, you can keep the money growing for retirement.
Making your kids help is good.
It’s a good idea for students to be responsible for at least some of their education costs. This may help them take their education more seriously.
How much skin needs to be in the game? Some parents share the cost 50-50. Others ask their kids to be responsible for a specific aspect of their higher education, such as book costs or room and board. It’s really up to you, your family budget and your parenting philosophies.
You may also want to talk to your kids about their future career goals. Many careers don’t require a college degree. Some young adults may be better in vocational training or a trade apprenticeship.
Life insurance can protect your plan.
An unexpected death can put a wrench in a family’s financial planning … including college savings goals. Life insurance can help even if you’re no longer around. Your child could use the income tax-free death benefit to pay for education costs.
Scholarship applications are worth the time.
Work with your child to research the wide variety of scholarship opportunities out there. Pay attention to deadlines and encourage your child to apply for as many as possible.
Modern Woodmen awards $450,000 each year to member students through Make An Impact Scholarships. (3)
With an emphasis on volunteerism, the scholarship competition rewards those who are making an impact in their local communities. Talk to a local representative for complete details and eligibility requirements.
- For illustrative purposes only. Figures do not represent any particular investment, nor do they account for inflation.
- Rules vary by state. Consult your tax advisor.
- Subject to change, fraternal member benefits are not part of the contract and may have specific eligibility requirements. Some benefits are not available to all members.
Ruth Ahnen, a Modern Woodmen financial representative in Davenport, can help you review your options for college savings, retirement and life insurance. A variety of options are available to fit your unique situation.
Disclosure: Thanks to Ruth for sponsoring today’s post. We at QCMB love working with local businesses to share positive information and make our community a better place to live, work and play.