10 Ways Parents Can Help Pay for College
According to CNBC, a four-year private university is expected to cost $303,000 by 2036 and public colleges could reach $184,000, nearly double what it costs now. With costs like that, how do you help pay for college without compromising your other financial goals?
Here are 10 types of tax advantaged and traditional methods you may consider when you want to help pay for college:
Qualified Tuition Plans to Help Pay for College
There are two types of qualified tuition plans. They consist of college savings and prepaid tuition.
With college savings plans, you establish an account for your student which can be used to pay qualifying educational expenses such as tuition and room and board. These plans allow you to invest in things like mutual funds, money market funds and fixed investments to help grow your money. What’s more, your contributions grow tax-deferred and earnings are taxed at the beneficiary’s rate, which is often considerably lower than the parent’s rate.
Because 529 plans enable funds to accrue over time, they are beneficial if started when the student is young. Even before your child is born, you can establish a 529 plan in one of your names and then transfer it after the child is born. But don’t overlook these beneficial plans as an option even if you don’t start saving until your child is older or even nearing college. One good way to help fund them is to ask family members to make deposits in lieu of gifts.
Funds for these plans must be used for qualifying educational expenses or there are penalties. Plus, there may be market risks, fees and expenses involved. They may also impact your student’s eligibility to qualify for need-based financial aid. Because of this, you should consult your financial advisor to help you determine the best options and tax advantages.
Coverdell Education Savings Account
As a long-term investment option, contributors may make after-tax contributions up to $2,000 per year until the child’s 18th birthday. Coverdell accounts grow tax deferred and distributions may be taken tax free provided funds are used for qualifying educational expenses like tuition, room and board, computers, books and supplies, tutoring, and transportation. Contributors have a high level of flexibility with their investment choices which can also be used for elementary, middle and high school educational costs.
Though there are income limits and funds must be used by the time the student turns 30-years-old, they can be rolled over to another individual who is related to the original beneficiary as long as they are under 30 years of age. This includes immediate family members, parents, cousins, aunts, uncles and even in-laws.
Prepaid Tuition Plans
With prepaid tuition plans, credits or units can be purchased at participating higher education institutions. When the student enters college, the funds can be applied to tuition at in-state public universities. Additionally, funds can sometimes be applied to room and board, depending upon the college.
Most of these plans are sponsored by your state’s government and have residency requirements. Some states even offer a full or partial income tax deduction. It’s best to check with your financial advisor to see which plan might be best for your situation.
Cash-Value Life Insurance
As a tool to help pay for college, this asset does not count toward the expected family contribution used as part of financial aid consideration. Money grows tax-deferred and distributions are generally tax-free provided the life insurance policy remains in force. What’s more, life insurance policies may continue to grow even after some withdrawals are taken from them.
If grandparents or other family members wish to help pay for tuition, the IRS currently allows payments to be made directly to the student’s school without counting as a gift to the student. Keep in mind that this practice can significantly reduce the student’s need-based financial aid eligibility.
To offset any reduction, you might consider if the college offers any discount for prepayment of multiple years. This practice could yield a significant savings, especially since tuition rates often increase each year.
Traditional Ways to Help Pay for College
There are many traditional methods to help your student pay for college. These include savings, CDs, money markets, tax-free municipal bonds, U.S. Treasury securities and mutual funds, financial aid, scholarships, borrowing and negotiating directly with the college of their choice. Here is a closer look at some of these methods:
Interest from Series EE and Series I savings bonds may be excluded from your taxable income, provided it was used for qualified educational expenses or contributed to a 529 plan during the year they were redeemed.
Have students start building their scholarship portfolio at an early age, by joining organizations that offer scholarships, volunteering after school and maintaining high grades. Though searching for scholarships can be time intensive, the benefits of locating these funds can be worth the effort. You can start by searching online for scholarships that meet your student’s profile.
When considering the health of parent’s retirement versus paying for your children’s college, a good rule of thumb to remember is that while you can borrow to pay for college, you cannot borrow to pay for retirement. As part of a financial aid package offered by schools, students may have access to subsidized and unsubsidized loans and parents may have access to unsubsidized loans. Though your student may not need to begin repayment for six months after they graduate, it might be a good idea to make payments while they are attending, to help lower the overall amount of interest paid on these loans.
To help determine what sort of financial aid package your student might receive, students should fill out a Free Application for Federal Student Aid (FAFSA). Colleges use results for determining needs-based financial aid each year. Some colleges may be willing to adjust packages to entice students to enroll. Also, students can attempt to negotiate needs- and merit-based financial aid directly with their school’s financial aid department.
Your student can write a letter that discusses why they are a good fit for the university and details comparisons with scholarship offers received from comparable colleges. Keep in mind that eligibility is based upon assets held in the student’s name, such as a trust or tuition paid by others as a gift, which could negatively impact the student’s ability to get need-based financial aid. You should check with your financial advisor to help you determine the best solution for your situation.
Selection of College
Though a delicate matter, sometimes reconsidering college choice is a good compromise. By reconsidering which college to attend your student might find a more affordable solution. Consider public universities or a combination of public and private to help offset costs.
When your student sets off for college, you’ll want to ensure you can help them in the event of a financial emergency. That’s why it’s best to seek the advice of a financial advisor on the additional tools you should have in place. Not only can they help you sort through the best option or combination of options to pay for college, they can help you keep your current financial goals on track.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (972) 931-3818 or at email@example.com.
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