Best College Savings Tips for Parents Getting a Late Start
5 Tips to Help Jump-Start Your College Account
One financial planning goal that always seems to sneak up on families is paying for a college education. Many families get distracted by the challenges of meeting day-to-day expenses through the years, and they don’t even begin to think about paying for college until their children are in their preteen or teenage years. That doesn’t leave much time to scrape together the necessary funds. This can force families to overly rely on financial aid and student loans to cover college costs.
But hope is not lost. It's possible to make a sizable dent in future tuition bills, even if parents have just one or two years until their child goes off to college. These are some college savings options that have proven themselves time and time again for panicked parents.
Prepaid Tuition Plans
One big frustration for parents without ample time to save is the pitiful return earned on most short-term investments. As of November 2019, the U.S. economy is in a low-interest-rate environment, which means that relatively safe investments rarely earn more than 2%.
For parents who don't want to take bigger risks by investing in an unpredictable stock market, a prepaid college tuition plan offers a great alternative to standard fixed-rate accounts. Prepaid college tuition plans essentially grow at the rate that tuition rises. From 2018-19 to 2019-20, college tuition rose 3.4%. As a result, this offers a somewhat attractive alternative to the 2% (or less) paid out by money market and CD accounts.
To sweeten the deal, some states even give parents a tax deduction or tax credit for contributing to these plans.
The main downside to a prepaid tuition plan, however, is the fact that you might be limited as to where you can redeem the prepaid credits. Additionally, not states guarantee their plans, so you could lose a portion of the money — even if the plan is supposed to be "safe."
Section 529 Education Savings Plan
If you have a higher risk tolerance, it might make sense to use a 529 Education Savings Plan as opposed to a Prepaid Tuition plan. You have more flexibility in where your child attends school, and you might also get a state tax break for contributing.
With a "regular" 529, you're able to invest the money in stocks, bonds, mutual funds or ETFs and take advantage of the potential growth. You might even be able to make up for starting late with the help of a solid bull market run. The money grows tax-free as long as it's used for qualified education expenses.
However, you also run the risk of losing out if your child needs to take distributions during a period of market volatility. You can reduce some of your risk by shifting assets to bond funds and other less-risky investments as your child gets ready to attend school.
Consider asking relatives to contribute to your child’s college fund. By redirecting their generosity into a Section 529 account, they’re giving a gift that truly keeps on giving. Many of the states that permit tax deductions for funding a college account allow a person to take the deduction even if it is not their child. Further, the IRS allows individuals to gift certain amounts each year, which allows wealthy grandparents to slowly reduce their eventual estate tax burden.
Upromise rewards parents and students for shopping at participating retailers. Under this free program, major retailers deposit a portion of what is spent into a college account designated for a particular child. To sweeten the deal, your Upromise account allows you to send invitations to friends and family who may want to register their credit and debit cards with the service, as well. Your child receives additional contributions every time they shop.
You can also boost your ability to save with the help of the Upromise Mastercard. Cash back earned on purchases goes into your child's Upromise account. Plus, you can connect the Upromise account with a 529 to get a bonus and put that money to work earning compound interest.
It is generally considered a bad idea for older parents to try to use a life insurance policy as a short-term savings vehicle for college tuition. If you already own a cash value or whole life insurance policy, though, you can withdraw money from it or switch over to a term insurance policy to save money on premiums. Talk to a financial planner who can help you decide if this approach makes financial sense for your family and your life insurance plan.
Get Two Extra Years
Parents and students are increasingly ditching the notion that it's best to spend all four years of undergrad at a four-year college. Consider sending your child to a lower-cost community college for the first two years, while they continue to live at home.
If your child can knock out their general education requirements while living under your roof, you will save on a substantial amount of out-of-pocket costs. You'll also give yourself an extra two years to save more money. As a bonus, you can encourage your child to get a part-time job and help contribute to the cost of the degree. Few things motivate a student to take college seriously like the realization that they are spending their own money.
What About Your Retirement Account?
Some parents are tempted to raid their own retirement accounts in order to help their children with college costs. While it's possible for you to withdraw money penalty-free from an IRA to cover college costs for your child, it might not be the best idea.
Once you withdraw that money, it's no longer working on your behalf. As they say, there are loans for school, if necessary, but no loans for retirement. Don't put your own future at risk to pay for your child's college.
The Bottom Line
It’s never too late to start thinking about the best ways to pay for college. As you're searching for ways to save, don't forget to keep an eye out for any scholarships or grants that can lower costs. Get creative, get your student involved, and start saving!
Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement." Accessed Nov. 28, 2019.
U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Nov. 28, 2019.
CollegeBoard. "Average Published Charges, 2018-19 and 2019-20." Accessed Nov. 28, 2019.
Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Nov. 28, 2019.
Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed Nov. 28, 2019.