These days we have so much information at our fingertips to help solve any parenting dilemma (admittedly, most of the times we may have too much). You could argue the Internet was both the best and worst thing to ever happen to parenting.
Despite the sometimes overwhelming amount of information, it’s still nice to consult a parenting expert once in a while to get some new ideas, advice and even a dose of perspective.
At LiveMom, we want to help answer your questions, and so we’ll be starting a regular feature called Ask the Expert. We’ll take on anything from potty training to car seats to dealing with kids and technology to anything in between. Then, we’ll find local and national experts to help guide us to make the best choices for our families.
As parents, it’s so easy to get caught up in the day to day, especially when it comes to our finances. But as much as we would rather not think about it, many of us will likely be faced with the prospect of paying for at least part of our children’s college bill. This leads us to today’s question:
What steps should parents take now to provide children with some money towards college expenses? How should parents balance retirement planning with college investments?
Helping us answer today’s question is Christina Winch. Christina built a nationally recognized wealth management firm while raising three active and artistically inclined children. Now CEO of Winch Financial, a company with more than 580 clients and over $200 million in assets under management, Christina is a frequent lecturer, teacher and media personality. Christina will be leading a workshop during this summer’s MomCom event. Here’s her advice:
The best preparation for college financing begins long before the ACTs, college visits and loan applications.
The first thing parents should do is take a thorough look at their own finances and then determine how much they will contribute to their children’s post high school education. Loans are available to fund college, not to fund a retirement. Do not pull money from your retirement account, or re-direct your planned contributions from your retirement account to a college savings account.
I also believe students value their education more when they also work to help pay for it.
Many scholarships go unclaimed so encourage your student to continue applying for them after their freshman year in college.
Cost should play a key role in the college decision process and students should consider state schools, two-year schools, commuter schools and on-line universities. The statistics are alarming. Over 1 million adults currently have student debt that exceeds $100,000 and the average amount of student debt has increased to $27,253 in 2012, a 58% jump. As a percentage of household debt, student debt has climbed to 8.5%. That’s an increase of three times the percentage 10 years ago.
To set up a college savings account, we recommend a 529 Plan, but we encourage parents to research the options available to them within the plan. Most states offer plans with age-based allocation options, but the administration options vary from state to state and not all plans offer a guaranteed rate of return.
The advantage of a 529 plan is that the money grows tax free, it is “qualified” for educational purposes; in most cases this means tuition, room, board, books, travel and school supplies. Most of these plans have very low minimum contributions.
Assets from a 529 plan are protected from bankruptcy.
Educational Savings Account (Coverdell)
Another option for those investors who want a little more control over their account is an educational savings account. The benefits of this account depend entirely on the income levels of the contributor. For anyone seeking financial aid, however, colleges consider assets in one of these accounts the student’s and not the parents’, which reduces the student’s eligibility for aid.
There is an annual contribution limit of $2,000 per beneficiary and parents who exceed income limits are not permitted to make contributions. The money in the account grows tax free and withdrawals for educational purposes are tax-free up to a limit determined by the beneficiary’s qualified status (income level).
A third excellent option, again depending upon your income levels, is to set up a Roth IRA account for educational purposes, which will not affect the student’s ability to receive financial aid. These accounts offer a wider range of investment options and parents or grandparents can contribute up to $5,500 annually ($6500 if aged 50 or over) to a Roth IRA. A child working for his or her parents also can set up a Roth IRA.
Contributions are not tax-deductible, but the investments grow tax deferred and are tax free when taken out. These withdrawals can be used to fund a child or grandchild’s education. If not needed, contributors are that much more prepared for retirement.
We caution against co-signing a private student loan as you consider how you will fund your child’s education. Before a parent or grandparent considers co-signing a private student loan, he or she should evaluate the risk for nonpayment and the effect on their own credit rating. A key question to ask before co-signing is who is responsible for re-payment of the loan if the student dies or becomes disabled.
It is best to talk with a trusted financial advisor for help in setting up a college savings plan.