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College Funding Strategies

Helping your children or grandchildren with college expenses can be one of the greatest gifts you’ll ever give. But as college costs continue to soar, early preparation is critical. By choosing a college planning strategy, you can make an investment in your future student that will last them a lifetime.

It starts at the baby shower…Comments about the cost of college can overwhelm new parents. Amidst sleep deprivation and drastic life changes, it’s easy to forgo college planning. Diapers, formula and child care are expensive priorities. For stay-at-home moms or dads, there are new struggles as the family adjusts to a single income.

Yet, many parents recognize higher education is critical. With college costs on the rise, more and more young adults are graduating with significant debt or abandoning higher learning all together.

Every family has to determine what works best for it when it comes to saving for college, but it’s well known that even small contributions and continuous savings can make a difference. Depending upon the plan, funds can grow over time and what may seem insignificant today could make a big impact tomorrow. There are many different ways to save. By educating yourself on the options, you can decide what makes sense for your family in the short term and what can give you a financial advantage in the long run.

529 Savings Plans

Designed for college saving, these plans are generally operated by states or educational institutions. A 529 Plan can be opened at any time and kept until needed. You can open a 529 Plan in any state, depending on the requirements, but the funds must be used for qualified education expenses or there’s a tax penalty upon withdrawal. The big potential benefit is that savings grow tax-deferred, and when needed, the funds can be withdrawn tax-free so long as they are used to pay for qualified education expenses. A 529 Plan is owned by the purchaser for the benefit of the beneficiary. If that beneficiary ultimately decides not to go to school, another beneficiary can be selected.

It is important to know that there are two general types of 529 plans, college savings plans and prepaid tuition plans. Research how each works and then decide which may be a better fit for your family. (Related: Getting the Most Out of Your 529 Plan)

Savings Strategies

Saving for college is a selfless act. It begins with looking at your spending habits and identifying where you can cut back. Look for judicious spending and allocate funds differently. We love our children and we want to support their dreams and interests but being cognizant of extracurricular spending may allow for more contributions to be put away. Many 529 Plans have a minimum contribution limit such as $50. By starting small and opting for monthly, automatic contributions you can start to build college savings into your budget.

The good news about day care costs is the expense may decrease as an infant grows to a toddler and then goes on to elementary school. While it’s tempting to tap these funds for current needs, consider adding your newly found “raise” to your child’s college savings.

If you are fortunate to receive annual bonuses or other unexpected income sources such as a tax return, set aside some of it toward your 529 to boost investment. It's important to regularly analyze how you're dividing your savings budget throughout your portfolio of investments.

If you pick a monthly dollar amount and stick to it, savings calculators can help you estimate what your savings might be. For example, if you start a 529 Plan with $1,000 and contribute $100/month over 18 years, your contributions would add up to $22,600, assuming no growth rate of return. Try our 529 calculator and test some contribution values and results.

Friends and Family

529 Plans offer easy ways for family and friends to join your savings efforts. Anyone can make a contribution to your child’s 529 Plan. Considering how quickly kids outgrow clothes and toys don’t be afraid to share your long-term goals particularly around holidays and birthdays. Start early. The opportunity for compound interest can be a a valuable gift. By contributing sooner, rather than later, the money in a 529 Plan generally has more time for potential growth and to ride out any market downturns.

Loans and Late Saving Strategies

It's never too early, or too late, to start saving. A lot of parents begin to save when their children are in middle school. Money market accounts and CDs can help increase short-term savings, but a few other strategies can also help maximize your college savings dollars.

For example, if you own a whole life policy, it may provide some added benefits beyond the death benefit. When applying for financial aid, a portion of the funds in a 529 Plan is often considered before a financial award is determined--but life insurance is not. Parents may still be able to take a loan from their whole life policy for a child's education. 1

Educational loans can also be options for some families. What you want to stay away from is tapping into your retirement to pay for college. Relying on your retirement funds to pay for your child’s education can significantly impact your ability to retire, or the ultimate timing of your retirement. (Related: Paying for College via Direct Loan)

Additional savings options may also be available. For example, supplemental shopping reward programs like UPromise can help defray the costs of education by allowing you to earn funds that can help support the cost of education. In addition, the SmarterBucks app can help with student loan debt by earning credit on routine purchases. Both programs feature a healthy list of major retailers and allow you to enlist family and friends to share their shopping rewards with your student. For more detailed information and requirements about these programs, you should check with the program directly.

There are many college savings options for you and your family. Be sure to consider the best possibilities to meet your needs in the short- and long-term.

Plans allow contributions to a state sponsored plan for higher education expenses. Owner may change the beneficiary of the account to another eligible family member of the original beneficiary. Section 529 plans are authorized under IRC § 529 and are sponsored by the individual states. Some states may offer preferential state tax treatment if certain conditions are met. Contributions grow tax-deferred and qualified withdrawals are federal income tax-free. Gifts to a 529 plan qualify for the annual gift tax exclusion. Annual exclusion gifts to a 529 plan can also be front-loaded for a period up to five years. Taxable withdrawals may avoid the additional 10% penalty tax if they occur on account of death, disability or receipt of a scholarship.