Paying For College: Ways To Save

Last week, we examined how decisions play an important role in paying for college. This week, we look at ways to pay for college. While parents usually assume the responsibility of funding their kids’ education, kids can also be involved in saving for their own education. Let’s look at the ways to save and pay for college.

529 Plan

One of the most popular ways to save for college is through a 529 plan. Named after Section 529 of the IRS tax code, you guessed it! There are tax benefits to saving in this type of account. The main tax benefits are that your savings grow tax-deferred, and your withdrawals are tax-free if used for qualified education expenses. Depending on the state you live in, contributions to the 529 plan may be deductible for state tax purposes, but are not tax-deductible on federal taxes. Not all states offer a 529 plan, but you can still open a 529 plan offered by another state. Keep in mind that a 529 plan is like the flower pot we reference time and time again. You choose the “seed” investments that go in the account, so you can gain or lose money, depending on how your investments perform. We’ll take a deeper dive into the 529 plan in the future, but there is a good introduction provided by the U.S. Securities and Exchange Commission.

Prepaid Tuition Plans

We won’t spend much time on Prepaid Tuition Plans because only a few states offer this option. If you live in a state that offers this option, the plan allows you to buy future credits at today’s tuition prices. As an example, if one course credit costs $1,000 today, but doubles to $2,000 by the time you go to college, you essentially got a 50% discount on education. Think of it as locking in tuition at today’s prices. The downside to this plan is that you are pretty much stuck with choosing a participating in-state college. Although your state’s Prepaid Tuition Plan may offer some portability to other in-state and out-of-state colleges, the penalties and reduced benefits of choosing non-participating colleges make other savings options more viable.

Non-Qualified Account

If you want the most freedom and flexibility, then a non-qualified account will be your best choice for college savings. This can be through a bank savings account or a brokerage account (which allows for investments beyond cash). Like a 529 plan, your savings can go up or down, based on what you invest in. Unlike a 529 plan, your earnings don’t receive any tax benefits, so taxes take a bigger chunk out of savings. However, you can use the money however you choose, even if it’s not for college. The previous options are not as forgiving when withdrawing money for other non-education expenses, charging an extra 10% withdrawal penalty, in addition to taxes on withdrawals.

Financial Aid

We mentioned last week that scholarships are worth a try, since they are essentially free money that does not have to be paid back. Grants are also free money, but not everyone qualifies for grants because they are based on a family’s financial need. Another need-based option is work-study, where students are given a part-time job to earn money while attending school. Finally, if there is not enough money to pay for college upfront, you can borrow money in the form of student loans. While you are required to pay back the money with interest, the interest rates on student loans are relatively low compared to other types of loans, and you usually have a grace period after graduation before repayment begins. Both parents and children need to be involved when it comes to financial aid – scholarships, grants, work-study and loans. The other options begin years in advance, sometimes as early as birth, so parents typically shoulder the responsibility of saving. On the other hand, financial aid planning happens the year before college, so children have reached an age where they can and should be involved in financial decisions.

As a reminder, college decisions are just as important as saving for college. That’s why both parents and children need to be educated (excuse the pun!) when it comes to paying for college!

Homework: Students, test your business skills by giving parents a presentation on 3 different colleges and how you would pay for each one. Whatever format you use to present, be prepared for Q&A at the end!

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Paying For College: Decisions, Decisions

At a recent speaking event, I was asked by a concerned parent, “How do I prepare financially for my kids to go to college?” As important a role as parents have in funding college, the kids have an equal if not greater role in the cost of college education. That is because the kids are the ones applying to schools and deciding where they apply and ultimately where they attend. This question inspired me to answer with a two-part post on Paying For College, with this post intended for future college students and the next post intended for parents or whoever will be paying for college.

Kids have a lot to consider when deciding where to attend college. Let’s weigh the financial impact of those decisions.

State school or private school? When we hear names of private universities like Harvard or Stanford, we all know they come with a hefty price tag. Based on those two colleges, $50,000 a year seems to be the going rate as an undergrad. Is it worth paying all that money to go to them? Maybe. But if you can’t readily afford $50,000 a year, will you be earning enough money after college to pay back your student loans? Do you even want student loans to eat a portion of your paycheck after college? US News & World Report calculated in-state tuition to be 73% less than private colleges. Imagine your favorite gadget or clothes at 73% off. That’s a hard deal to pass up! If your heart is still set on being an Ivy League grad, perhaps it’s worth considering a transfer after you have attended a year or two at a state college. Just remember, there is more than one path you can take.

Live at home vs. dorm/apartment? Another reason to consider an in-state college is to save on living costs. Living away from home can be pretty expensive. Not only do you have the cost of boarding, but you also have to think about food, laundry, dorm/apartment goods and travel to/from home. These are conveniences you didn’t have to worry about when you were in high school. Are you moving your car with you to college? That’s another bundle of expenses, from gas to parking. Living costs are probably as big a decision as college tuition itself.

To work or not to work? In addition to studying and partying, you will probably end up working during college. How else do you afford your college lifestyle? While a job teaches valuable lessons and can propel your future career, it can detract from your time and attention. Keep this in mind before you choose a college with a price tag that requires you to work. On the opposite end of the spectrum, there is the option to take a year off to gather working experience and build savings before continuing education. Some employers even offer to pay for a portion or all of your education expenses. Only you know what options are right for you, but the point is — you have options.

Scholarships and financial aid? Just like you apply for colleges, you can also apply for financial aid. Don’t be afraid to try for scholarships and financial assistance. You’re already filling out forms and writing essays for college applications. What’s another application? You might need some help from a parent to fill-out financial aid forms, but otherwise, this falls in your ballpark. You have to make the effort to apply!

These are some important considerations that not only impact your college decision, but also impact the rest of your life. So even if you’re not the one paying for college, your decisions matter!

Homework: Time to do some research! How much is tuition at colleges you like? What would your living situation be, and how much would it cost?

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