Planning for your children’s future college expenses can be very overwhelming. It’s a lot of money, its a long way off, and there are so many options out there on how to go about it! One of the best things you can do, however, is start early. Start big, start small – whatever you can do, but start now. Even modest savings can add up. If you invested $100 a month for 18 years, you’ll end up with around $48,000 (assuming an 8% average annual return)!
We did not seek advisement from a financial planner, so once our daughter was born I started to do some searching around. I wanted to know what options were viable for us, what advantages/disadvantages the different options had, and things to consider as we started mapping out how we are going to contribute to our children’s education.
I am not a financial planner. Let me repeat that. I am not a financial planner. The information below is simply what I’ve come across in my search for our best option, and if anything, I am hoping to get you thinking about yours. It is important to consider your own financial situation and circumstances.
Before you choose the best route for your family and finances, some basic questions to think about:
- How much time do we have to save?
- How much can we contribute at this time?
- What do we hope to be able to contribute in the future?
- Do we only want in-state options for schooling, or do we want options across the country?
- How much risk are we comfortable with for our investments?
- How much do we hope to cover? All expenses? We pay half, our child pays half? We pay four years and anything beyond that is up to them? Or whatever we can manage – we’ll see!
- How much control do we want over the investments?
- Is it important that you ensure the money will be used for college expenses?
- Will we be the only ones contributing to the fund? Or are there family members who would like to contribute as well?
- Will we be able to keep the money in the account, or are there anticipated future events that will make us withdraw early?
- Do we need to seek advisement from a financial planner? Or is this something we can comfortably plan for on our own?
A few options to look into (not a comprehensive list!):
- Roth IRA. More of a last minute strategy. Child must have their own income.
- Pre-paid plans. If your child is most definitely going to school in-state, lock in state tuition prices now.
- Custodial accounts (UGMAs and UTMAs). Set up a trust for your child and when they reach 18 or 21 depending on the state, they can use the money however they wish.
- Coverdells. Set up at a bank or brokerage firm. Similar to 529’s below, but more restrictions on things like how much you can contribute, your income, etc.
- 529 Plans. Perhaps the most used, and for good reasons. Sponsored by 50 states – you’ll need to check your state’s options and terms. These are easy to access and have great tax benefits. If you look into anything, look into 529’s.
- Also check with your employer to see if they offer different savings options
Things to remember:
- You most likely won’t need to cover all the cost. There are federal, state, and private grants and loans to bridge the gap. There are also many many scholarships out there!
- Saving for your retirement is more important than covering all of your children’s college expenses. Your children will have access to more sources for money for college than you will for your golden years. Do not sacrifice any retirement savings!
- Don’t think that putting money into a 401(k) will be held against you if you apply for financial aid. Formulas used to assess need generally don’t consider retirement savings as available assets.
- On the opposite end of the coin, don’t think that saving nothing will mean you should qualify for a lot of financial aid. You will have been expected to contribute some with your income taken into account.
Below I’m going to share the route we decided to take, and the advantages it had that were important to us and our personal financial goals. It is an example of a Michigan 529 plan, and if anything will show you different advantages, terms, and restrictions to look for.
We chose the Michigan Education Savings Program (MESP). Some of the reasons we chose it are briefly listed below.
- Tax Benefits. Contributions and any earnings used to pay for qualified higher education expenses are Federal and state income tax-free. Michigan taxpayers may also be eligible for a Michigan income tax deduction on contributions made.
- Anyone can open an account as long as they are 18. For example, your parents could open an account with your child as the beneficiary from any state.
- Anyone can contribute to your account. Think birthday and Christmas!
- Nation-wide options. Whether your beneficiary decides to go to a private or public college or university, in-state or out-of-state, trade or graduate school, funds in the account may be used for any type of degree program at any eligible higher educational institution in the nation and many abroad, not just Michigan institutions.
- Funds can be used for a variety of expenses. Funds can be used for tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance; certain room and board costs, and certain expenses for “special needs” students.
- Can transfer to another beneficiary. If your beneficiary does not attend an eligible educational institution, you may name another eligible beneficiary for your account.
- You don’t need a lot of money! The minimum contribution is $25 per beneficiary, per investment option. There are many ways to contribute including personal check, electronic funds transfer, automatic contribution plan from your bank account, payroll deduction, or a transfer of funds from another qualified 529 college savings plan.
- No Income Limitations
- Choice of Investment. You’re given nine investment options so you can find one (or multiple) that fits your tolerance for risk and financial circumstances. You can change your options once a year.
- Low fees. There are no sales charges, start-up or maintenance fees.
- Its easy. Set it up online in a few minutes (as long as you have the beneficiary’s social security number), you can access it 24 hours a day, and many account transactions can all be handled online.
Take a deep breath. Review your options. Find the best fit for you. And remember, start early – no matter how small! 🙂