With student loan debt higher than ever before, it’s important to make sure you’re setting your child up for success while attending college and the years after. Let’s talk savings and loans!
To lessen the burden of college tuition up front, many families begin to save for their child’s education after they are born. There are many options including qualified tuition plans (QTP or 529 plans), Coverdell Education Savings Accounts (ESAs), U.S. Treasury Savings Bonds and custodial accounts to name a few. Each savings account has different features and benefits:
- Qualified Tuition Plan (QTP or 529 plans) – these plans are either in the form of a prepaid tuition plan or a savings plan and are administered by a state or qualified school. These allow parents to buy tuition at today’s prices for use in the future. This helps eliminate the worry about rising tuition costs through the years. Interest earning on these accounts are not taxed or when the money is withdrawn to help pay for college, as long as the distribution is less than the qualified education expenses.
- Coverdell ESAs may be set up for beneficiaries under the age of 18 or those with special needs. The total contribution from friends and family may not exceed $2,000 per year, however there are earnings limitations to qualify. Earnings in the ESAs also accumulate to be tax-free and are not taxed time of distribution unless if the amount exceeds the college expenses.
- S. Treasury Savings bonds most of the time earn lower interest rates than other investments, and their security is guaranteed. Accumulated interest on bonds included in the Education Bond Program is tax-free when used to pay for qualifying education costs.
- Custodial accounts hold money and additional assets until a minor reaches a certain age (usually 18 or 21) with a custodian managing the money until that time. Interest earned is taxed at the minor’s rate and included on their tax return. These accounts have more flexibility in that they can be used for more than education, however, be mindful that the minor will gain full control of the assets when they reach 18 or 21 (and so could spend the assets on something other than what you would choose for them).
If you haven’t been able to set any money aside for your child’s secondary education – don’t fret! There are different loan options available for you and your child to consider together. The federal government does determine how much you are expected to contribute to your child’s college education based on information from the Free Application for Federal Student Aid (FAFSA). This is a document you will be required to fill out each year of your child’s college career, if you are looking to get a government-assisted loan.
There are many different types of student and parent loans. It’s important to maximize your federal loans before borrowing a private loan. Here are a few types of loans for an undergraduate degree:
- Federal Perkins Loan
- Federal Direct Loan
- Federal Parent PLUS Loan – this loan is co-signed with the parents and student
Once you’ve decided on the best course of action for your child to take to borrow money for school, it’s also important to empower them with the best information on how to handle their finances on their own. These are some ideas you can implement before they leave for school, or even get the conversation started sooner!
- Create a budget! Work together to help your child understand where their money comes from and where it goes. Break expenses down by month and category. Make a plan to review the budget together as the year progresses and make adjustments as needed.
- Talk about money boundaries – make sure to document what your child will be responsible for while at college and what you will be helping with financially.
- Track spending. It’s easy to lose track of spending even with a budget. Make sure to help your child understand the importance of tracking each purchase. There are many apps that make this easy, or a classic pen and paper method works, too.
- Getting income during school. Whether it’s your plan to have your child work when they are on summer break, or balance school and work, it’s important to set expectation around how they will contribute to paying for their life at college. Make sure to manage expectations though! School performance can suffer if a student is working too many hours.
- Help them learn about credit! Credit is an important thing to build, but it’s also important to ease into the world of plastic. Give your child a debit card and teach them how to use it. Be sure to turn off overdraft protection so they cannot use it if money isn’t available.
- Take a class! Many colleges offer personal finance courses. If this isn’t available at your student’s school, check in the local community. These classes will help your child understand the basics of finances, interest rates, debts and more.
Preparing for college and sending your child off into the world can be a sensitive time. BerganKDV has a team of financial advisors who can help you navigate all areas of your financial life. Want to learn more about what we can do for you? Start here.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.