Saving for College the Painless Way

Saving for College sounds much like an impossible feat nowadays right? Saving is defined simply as income not spent. Putting money aside, in your jewelry box, in a glass bowl, or under your mattress. Out of sight out of mind.

It’s hard to save for anything today.

Things you need vs things you want. However, what about for occurrences in life that are inevitable?

When I was younger, I wanted to learn how to play the guitar. I started working and I took half my paycheck and put it in a wooden box and once I had enough…..I bought the guitar. I knew the amount I needed to save and made a goal to save for it.

My parents started a 529 college savings plan for me as a child. It wasn’t massive in the beginning but by the time I got to college but man did it help especially during freshman year.

My point in all these stories is that we all have the ability to set something aside that will assist with the huge college costs. Besides putting money in a sack and keeping it under your bed, let’s talk about some other ways to save for college.

Saving for College Doesn’t Have to Be Hard

Saving for college doesn’t have to be hard. But what that said…why is there a stigma then that it’s virtually impossible. I can only think of two reasons as to why the perception is out there and that is:

  1. Lack of knowledge.
  2. Lack of money to make the initial “splash” on a potential fund or savings.

Unsure of Options?

From professionals and peers that I have spoken to I’d say it’s almost an even split with parents having started saving for college utilizing different accounts and the other half just not having the time to research and therefore are unsure of their options.

With that said, let’s look at some ways that you can save for college and then the pros and cons of each (noticed the trend of the cons mostly revolves around the taxing of these funds).

Mutual Funds

Mutual funds are a method I’ve seen when saving for college. Mutual funds pool your money together with other investors to purchase a share/collection of stocks, bonds, and other types of securities related to a portfolio. They are overseen by a portfolio manager.

A mutual fund is structured and maintained to match the investment objectives and performance is usually tracked as the change in the total market cap of the fund.

Pros and Cons of Mutual Funds

Pros:

  • Funds can be spent on anything – cars, computers, etc.
  • No investment limits and more than 10,000 funds available.
  • Wide variety of investment options.

Cons:

  • Earnings are subject to annual income taxes.
  • Capital gains are taxed when sold.
  • Will refund financial aid eligibility up to 5.64% if owned by parent and 20% if owned by student.

Custodial Accounts

Custodial accounts are set up by one person to benefit another. Most of the time the scenario is an adult who sets up this account for a minor.

There are two types of custodial accounts: UGMA and UTMA.

The UGMA (Uniform Gift to Minors Act) allows assets to b be transferred to underage beneficiaries when set up by an individual. The amount is free of gift tax up to a certain amount.

The UTMA (Uniform Transfers to Minors Act) allows a minor child to legally hold money and other property such as stock or real estate that normally a minor would be able to hold.

Pros and Cons of Custodial Accounts

Pros:

  • Money saved can be spent on everything.
  • No limits for how much you can invest.
  • Value of the account is removed from donor’s gross estate.

Cons:

  • Gains and earnings are taxed to the minor and can be subjected to a “kiddie tax.”
  • Unearned income over the amount of $2,100 for certain children up to the age of 23 is taxed at a marginal rate which is applicable to trusts and estates.
  • Student gains right to the account once they reach the legal age.
  • Money can be used at the student’s discretion.
  •  Counted as assets on student FAFSA. Aid package can be reduced by 20%.

Roth IRA

A Roth IRA is a retirement account that offers a tax benefit. Unlike the traditional IRA, the Roth IRA contributions are not tax-deductible.

Those earnings grow tax-free and there are no tax on the withdrawals.

Pros and Cons of Roth IRA

Pros:

  • Withdrawals can be at any time and for any reason.
  • 10% early withdrawal penalty is waived when funds are spend to qualified education expenses.
  • Many investment options available.
  • Value is not counted as an asset on the FAFSA.

Cons:

  • Maximum investment allowed is $5,500.
  • Only married couples earning less than $189,000 or individuals earning less than $120,000 may contribute to maximum amount.
  • Married couples earning $199,000 or more and $135,000 for individuals are ineligible to contribute.
  • Withdrawals from Roth IRA to pay for college is counted as your base-year income on FAFSA.

Coverdell ESA

A Coverdell ESA (Education Savings Account) is a tax-advantaged account designed to help save for educational expenses. With similarities to a Roth IRA contributions are made to a Coverdell ESA on an after-tax basis meaning you don’t get a tax deduction for the money deposit.

Qualified withdrawals of contributions as well as investment profits for education expense are indeed 100% tax-free.  

Pros and Cons of Coverdell ESA

Pros:

  • Take advantage of tax-free withdrawals to pay for higher education expenses and also k-12 expenses.
  • Offers a broad range of investment options.
  • Value of the Coverdell ESA account is counted as a parent assed on the FAFSA no matter if a parent or dependent student owns it.

Cons:

  • Maximum investment amount allowed is $2,000 per beneficiary per year and that’s combined from all sources.
  • Contributions have to be made before the beneficiary turns 18.
  • Account can only be used until they turn 30.
  • Married couples earning between $190,000 and $220,000 (individual’s earnings between $95,000 – $110,000) are able to contribute.

529 plan

We have discussed the 529 College Savings Plan at length and will continue to do so as I am a big fan of it. So if you want to check out everything with the 529 plan, check out the following posts:

Pros and Cons of 529 Plans

Pros:

  • Withdrawals spent on qualified higher education expenses and up to $10,000 per year in K-12 tuition avoid federal tax.
  • Depending on which plan you use, the maximum investments can exceed $500,000 over the life of the account.
  • Receives favorable financial aid treatment on FAFSA.

Cons:

  • Earnings are subject to a 10% income tax if not spent on qualified education expenses.
  • Investment strategies available are limited.
  • Withdrawals from accounts owned by someone other than the student or their parent have to be added back to the students income on the following year’s FAFSA and can reduce aid eligibility.

But Saving for College is too difficult. Or is it?

If we sit and think of the cost of college as a problem and the remedy to said problem is with a lot of money, then we are no different than those who just wish they’d win the lottery.

The lump sum method (although amazing) is not realistic for the majority of families. With our mortgages, monthly expenses, and potential our own student’s loans to pay back….it may just seem near impossible.

For parents this is a balancing act. I get it I do. I often scratch my head and say how on earth is this going to happen. However, I trust and know that it will.

The Ice Pick Method

I forgot where exactly I was when I first heard of and comprehended what is the Ice Pick method to pay for college. In fact I can’t even remember if I said the name or someone told (sorry I have children and my memory is shot).

Nevertheless, a light bulb went off. The light bulb going off was telling me that to combat the insane cost of tuition, we shouldn’t put all of our eggs in one basket (i.e. full ride scholarship, student loans, financial aid, or on the personal side….the lottery).

If it happens great, but there is really a remote chance that it’s going to. So let’s Ice Pick the cost of tuition by doing a variety of things and using a variety of strategies.

Okay great so let’s chop away at the cost of college. Easier said than done right?

It all starts with a plan and that plan can consist of:

  • Start early.
  • Research of degree choices.
  • ROI degree vs salary.
  • Crunch numbers to potential schools you want to go to (public and private).
  • Nail down a realistic number needed.
  • Look at one of the fund mentioned above (it doesn’t make a lot of money to open).
  • Come up with a consistent amount you can contribute to the funds on a regular basis.
  • Research available scholarships.
  • Factor in College Grants.
  • Financial aid received from FAFSA.
  • Include Federal Subsidized and Unsubsidized Loans into the equation.

See what we did there? We just mapped out several ways to plan and potentially pay for the degree. Now, these I will be eventually going into more detail in future posts. However, I just wanted to paint you the picture and ease your mind so you can see if broken down, it may not be that bad.

What Can Students Do To Save for College?

We talked about what the parents can do with regards to savings for college, but what can students do to take for college? Getting involved along with your parents will really create a viable force (plus your parents will really appreciate it too!).

Options for students

  1. Apply for Scholarships – Small ones add up and add up fast. Remember the strategy is not to get the home-run, but several singles, doubles, and triples that add up.
  2. Take AP Classes – It’s less you will have to pay once you get to college. Every AP class you take knocks off one less class to take in and pay for in college.
  3. Get a job – Part-time jobs really help out. If you can control your spending habits and really focus, then your little part-time job can really make a dent. Plus, during the summers you can up it to full-time.
  4. Open a savings account – For the money from your part-time job to go in, a savings account is a great option and it gives you responsibility. If under 18, you’ll need a joint holder.
  5. Save money – Obvious but it’s a hard one. It may make your social life tight but let’s be honest here at 15-16 what high profile social life do you really need? Hanging with your friends at a house or somewhere low key is just as valuable. Let everyone else spend their money while you be strategic.

I think they more we also educate our children on this, teach them the basics and value of money and put together a sound financial plan for college with them, then we will be ahead of the game.

Saving for college takes work, discipline, and consistency on both the parents and the students to have this all come together. Its multiple streams of money from various courses that creates how you will be able to pay for tuition.  

Unfortunately, it’s not talked about enough or even thought about enough. Most sweep it under the rug and when the time approaches, they panic and honestly don’t know how they will do it.

Don’t be that person please. Let’s make the commitment right here and right now to not be another statistic.

Well that is all for now. I would love to hear from both parents and students as to what your thoughts are and what you have to say on the topic of saving for college. Let’s make it something we talk about more frequently and get comfortable with figuring out how we can tackle this together.

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