Saving for College

College is an investment in your child’s future. It can be a major expense. Talk to your kids at an early age about college and their future career goals. Some careers may not require a four-year degree. With tuition prices rising every year, what’s the best way to manage education costs? Here are a few planning pointers.

1. Saving some is better than saving none

Saving the entire amount your child will need for college may be unrealistic, but avoid using this as an excuse to not save at all. It’s best to start saving as early as possible, because you will benefit from compounding interest over time.

2. Saving costs less than borrowing

Some parents fear saving for college hurts their child’s chances for scholarships and financial aid. While grants may be available, most financial aid for students involves getting a loan. Any amount saved is that much less your child will need to borrow.

3. There are many different ways to save

You have a variety of options. Two plans specifically designed to encourage saving for future college costs are 529 plans and Coverdell education savings accounts. Both offer tax advantages.

Some differences:

• You can contribute a larger amount of money to a 529 plan. Some plans have contribution limits of $200,000 or more. With Coverdell ESAs, you’re limited to $2,000 per year. Additionally, your ability to make a contribution is determined by the amount of your modified adjusted gross income.
• Money saved in 529 plans must be used for higher education expenses. You can use qualifying withdrawals from a Coverdell ESA for education expenses that occur before college, such as the cost to attend a private high school.

4. You can save for retirement and college with one plan

You don’t have to choose between college and retirement savings goals. A Roth IRA can help you achieve both goals simultaneously.

• It allows your family to save up to $11,000 ($5,500 for each parent under age 50) per year. Parents over age 50 can save up to $6,500 each per year.
• You can withdraw part or all of these contributions to pay for college without income tax consequences or penalties from the IRS. Your earnings can remain for retirement.
• If you’re over age 59½ and have held a Roth IRA for at least five years, you can withdraw your earnings as well without income tax consequences. (Note: If you’re younger than 59½, the 10 percent penalty from the IRS does not apply on earnings you withdraw for qualified college expenses. However, your earnings will be subject to ordinary income taxes.)
• Parents maintain control over the funds.
• A Roth IRA (like other retirement accounts and life insurance) is an exempt asset on the Free Application for Federal Student Aid (FAFSA) application.
• If your child doesn’t need the funds for education, you can keep the money growing for retirement.

5. Sharing costs can be a good option

Splitting up expenses can give your children responsibility in their education. You could share the cost 50-50. Or you could ask your children to be responsible for room and board or other expenses. It’s really up to you, your family budget and your parenting philosophies.

6. Scholarship applications are worth the time

Work with your child to research the wide variety of scholarship opportunities, and encourage your child to apply for as many as possible.

Modern Woodmen awards $450,000 each year to member students through Make An Impact Scholarships. This scholarship competition rewards students who are volunteering in their communities. Talk to your Modern Woodmen representative for more details.