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Tips on Saving for College

Wed, 11/06/2019 - 11:25
Baker Library at Dartmouth College in Hanover, N.H.
Ken Lund

It’s that time of year, college students are back on campus, middle and high school teens are decorating their new lockers, and elementary school kids are settling into the new routine. A new school year is upon us.

As the parent of a new sixth grader, I was recently struck by the fact that my son will be in high school before I know it, and then, poof, off he goes to college. Where does the time go? When he was born, I repeatedly heard that the days would be long but the years would be short. Wow, is that ever true!

Thinking about the passage of time coupled with the start of the school year highlights how important it is to create a plan for saving for your child’s or grandchild’s education. 

I’ve heard many people say they will think about college savings later, but saving for education isn’t something to put on the back burner. Time is on your side when it comes to investing and saving. More time creates the opportunity for compounding growth. The power of compounding growth is profound, just ask Warren Buffett.

However, even if you know you should be saving for college, it can be difficult to start and to maintain the discipline of continuing to save. This is especially true if you have questions or don’t have a clear strategy or plan.

Below is a list of common questions we receive about education planning. Every family has its own financial and personal considerations that must be factored into any investment and savings plan, and with professional guidance, it is possible.

Question #1: Do I need to save for my child’s college education? Isn’t there a good chance she could receive a scholarship?

The reality is that only 2 percent of high school athletes receive scholarships to play a college sport, and only a small portion of college costs is covered by the scholarship. The average athletic scholarship for the most popular sports averages $5,000 to $7,000 yearly, which is only enough to pay a small portion of total college costs.

Question #2: If my child receives a scholarship for college, what happens to the money invested and saved in a 529 plan?

The money in the 529 plan is not lost. If a student earns a scholarship, the family can either transfer the unused 529 plan assets to another family member, keep the money invested for future education such as an advanced degree, or withdraw the amount equal to the scholarship without paying the 10 percent federal penalty tax.

Question #3: What happens if my child receives a merit-based scholarship or free grant?

Only 0.3 percent of college students receive enough grants and scholarships to cover the total cost of college. The reality is that during the 2017-18 academic year, 57 percent of families received merit-based scholarships averaging only $7,760, which covers only a portion of college costs.

Question #4: Will the cost of college go down at some point in the future?

No one can predict college costs in the future. Over the last 10 years, college costs have increased at 3.1 percent annually for public colleges and 2.3 percent for private colleges.

Question #5: I have money saved in a bank savings account and make contributions monthly; won’t that money be enough to cover college costs?

The average cost today of one year of a public college is $21,400 and $48,500 for a private college, but in 18 years, that cost could easily double. With bank savings accounts and CDs paying historically low interest rates, many families may not meet their college saving goals. It is important to understand all the college savings options in order to maximize growth and tax savings.

Question #6: Can I use money in a 529 account to pay for grade K-12 tuition?

Yes, the Tax Cuts and Jobs Act of December 2017 allows for federal tax-free withdrawals of up to $10,000 annually per student on money used for qualified education expenses. However, New York State (and some other states) has not conformed to the new federal rule, and a distribution for K-12 tuition may require a recapture of state tax deductions or credits. It is recommended that you consult a tax or financial adviser for more information. 

Question #7: Why do I need to save now? I’ll pay for college from my current income when my child goes to school.

It is impossible to predict one’s income in the future. Long-term planning and saving over multiple years or even decades should allow your money to grow and place you in a flexible position when paying for higher education. A 529 plan account, as one popular tool, may allow you to spend less out of pocket by investing now. The long-term growth potential and favorable tax status utilized in a 529 plan means you are likely to pay less out of your own pocket for college.

Andrew Stern is managing partner of YorkBridge Wealth Partners of Bridgehampton.

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