As a financial advisor, I’ve encouraged clients for years to consider college savings as part of their financial planning considerations. However, until my son started college a few years ago, I didn’t have firsthand experience. This made it even more real for me – it reinforced how important saving for college can be for families. As I reflect on this recent experience, here are some tips to consider:
1. Start early. My parents had the expectation I attend college; however, as I was growing up, there wasn’t much focus put into how it would be funded. I was able to get my 4-year degree, but paying for it was stressful at times. I’m now a parent of four, and just like it was for me, college is an expectation. Whether your philosophy is to pay for all their college expenses, or none, the more you (or they) save for college now, the less they have to worry about later. Research show that students with college savings accounts are three to four times as likely to graduate from college than those without.* Talk to your kids about your saving philosophy and help them begin to understand how savings can add up over time.
Understand the basic cost of higher education. According to the University of Nebraska Admissions department, the yearly cost for tuition, room, and meals is $22,012 per year (in-state). This is the average cost today. If your child has ten more years before they enter college, consider the impact of inflation and what the future cost will be. Also, discuss with them how their choice of college can impact their situation. A basic understanding of today’s cost will help you both make savings decisions. As your child enters high school and starts to make decisions on college choice and major, discuss with them the cost advantages of each and how this might impact them. Also, help them understand that it’s less expensive to save than to borrow. The chart below illustrates how wise it is to save on the front end (Source: Nest529direct).
2. If you live in Nebraska, a 529 account can be a great option to consider. I’m a fan of the Nebraska College Savings Plan. It’s not the only solution and every situation is unique. However, for many of our clients, the 529 is a great option. There is no minimum amount to open an account, friends and family can make contributions, contributions to your NEST account are made with after-tax dollars, and your earnings grow federal and state tax-deferred while they are invested. When it’s time to use the money for college, your withdrawals are tax-free as long as the funds are used for qualified college expenses like tuition and room and board. Plus, if you live in Nebraska and you are the account owner, you are eligible to receive a Nebraska state income tax deduction of up to a maximum of $10,000 ($5,000 if married, filing separately) for contributions you make to a NEST account.
What if your child receives a scholarship? For any qualifying expenses in excess of the scholarship amount (i.e., tuition, room, board, books, etc.), withdrawals from the 529 are penalty and tax-free. In the event you have saved in excess of scholarships received, you can withdraw the amount of the scholarship without having to pay a penalty but you will have to pay taxes on earnings.
In Fidelity Investments’ 2019 College Savings: Lessons Learned Study, top advice offered to those just graduating college for college-bound students was this:
- 47% said they would research more grants and scholarships to help offset costs
- 37% said to save as early as possible for college
- 34% said to take on as little debt as possible
- 34% said to research and understand financial aid and the implications of taking on student loans
I don’t know about you, but my kids usually don’t seem to think I’m “in-tune” with the most recent trends. This study would suggest, I’m “on-trend” when it comes to my advice on saving for college!
If you need help starting a college savings plan, reach out to us. We will work together to find the best plan tailored to fit your needs