September is National College Savings Month and a great time to start thinking about and creating your college savings plan if you or a loved one is planning to attend college. Even if you aren’t sure yet what type of college or the total costs involved, it is smart to start planning as early as possible. Lack of planning and saving coupled with increasing tuition costs is part of the reason why there are 45 million student borrowers in the United States with total loans outstanding in excess of $1.56 trillion dollars as of February 2020, according to Forbes. Even though student loans are a feasible source of funding higher education, they don’t have to be the main source. Here are some great ways you can start planning and saving for college early so you aren’t relying too much, if at all, on student loans.
Create a Budget
If you don’t already have a budget, this is a great reason to start one. Estimate about how much you think you need to save for college in total, then divide by the number of months left to get the amount needed to save per month. Writing it down and knowing your goal will keep you accountable to start and stick to your budget. Reevaluating it annually or even quarterly will also provide you time to make adjustments if needed to reach your goal based on changes in income, tax status and more accurate cost estimates. Plus, the sooner you start, the more you’ll be able to save by maximizing compound interest. The chart below shows the power of compounding interest and advantage when you start saving early.
Graphic provided by Balance Financial Resources, 2017
Start a Savings Account
There are many options for college savings products. You can start simple and open a basic savings account, certificate or certain IRA account. If you want to realize the most interest and tax advantages, the best place to start is to consult with a financial advisor. There are many factors to consider like tax implications, income requirements, affects to financial aid and more. SDCCU Investment Services
offers a free financial consultation and can provide you options for the investment accounts available that are the best for your specific situation and goals. It is also prudent to consult with a tax advisor for the tax implications as well.
Here is a breakdown on the different savings options.
- Savings Accounts – If you want to keep it simple, a basic savings account can allow you to save as much as you can, contribute anytime, but has limited interest earning potential and is not tax deferred.
- Certificate Accounts – Certificate accounts can help you earn a bit more with a locked term, but contributions are limited due to term and it is not tax deferred.
- Roth IRA – Typically used to save for retirement, Roth IRAs are another vehicle to save as they allow for tax free earnings, contributions are taxed, but you are not taxed on distributions once you hit age 59 ½, and if before, the 10% early withdrawal penalty is waived if funds are used for qualified education expenses.
- Custodial Accounts or UTMA – The adult is the custodian of the account and it has no income, contribution or withdrawal limits but with limited tax deferred growth. Savings does count towards child’s assets and can affect financial aid.
- Coverdell Education Savings (ESA) Account or Educational IRAs– Grows tax free but not tax-deductible and requires income limits to qualify. Contribution amounts are limited, visit irs.gov for current limits. Funds must be used before beneficiary is 30 years old. Withdraws for education are tax-free, with many investment options and it counts towards the parents assets so has a smaller effect on financial aid.
- 529 Plans – If you want to maximize savings, grow savings tax free and don’t meet the income requirements for an ESA, a 529 might be your best option. There are many different options of investment, different advantages in programs by state with contributions being deductible, so talking with a Financial Advisor is encouraged to pick the best option for your situation.
SDCCU Investment Services offers free financial consultations to discuss your financial goals and help you select the best investment products for you. Financial Advisors are conveniently located in SDCCU branches or available by phone consultation. Meet our Financial Advisors on sdccu.com.
Learn more about financial aid, grants, federal loans and other ways to afford college during our free College Financing 101 webinars every week in September. Check the schedule and register at sdccu.com/fww.
Consult your tax advisor.
The Financial Advisors with SDCCU Investment Services are Registered Representatives of LPL Financial. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA
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