3 college saving strategies
- While education costs continue to rise, so does the value of a college degree
- Interest-bearing college saving plans can help you keep up with rising tuition costs
- Saving for education expenses could lower your tax burden now and in the future
The numbers are staggering: 71% of students come out of college with loans, with average debt per graduate at $29,4001 and a monthly payment around $351.2 Combined student and parent education debt of $1 trillion nationwide exceeds all outstanding credit card balances combined.3
These statistics aren’t that surprising, considering four years at a private university just topped $169,000.4 The good news? Higher education continues to offer a significant return on investment, with college graduates earning twice as much as those without degrees.5
With student loan debt and education costs at all-time highs, many parents struggle to make the right tradeoffs between keeping their kids out of debt and staying on track to a confident retirement.
So where do you start? First you’ll want to define educational goals and associated costs — check out our video below to find out how. Then you can begin building an education savings strategy.
Your advisor can assist with projecting future educational costs, addressing more complex planning needs for multiple children and finding the best savings strategy for your goals.
Here are three education savings vehicles that could help you stay ahead of rising costs.
1. 529 saving plans
Commonly referred to as “the 401(k) of education savings,” this popular savings vehicle allows funds to accumulate free of federal taxes. Many states offer tax breaks as well, including deductions for contributions and tax-exempt withdrawals.
The best part? Distributions aren’t taxed as long as they’re spent on qualified education expenses. Nearly every state offers at least one 529 plan, and the funds can be used at any accredited college or university in the country (as well as some foreign institutions).
Some 529 accounts don’t provide an adequate selection of investments to balance risk and growth. Your advisor can help you select a plan based on individual needs and goals.
2. Coverdell savings account
Another option is a Coverdell education savings account (CESA) that can be used for college tuition as well as K-12 education expenses for younger family members. Similar to a 529, CESA earnings grow tax-free and qualified withdrawals are exempt from federal and often state taxes, too. Contributions are limited to $2,000 per beneficiary, so these accounts are often used in tandem with a 529 plan.
Unlike a 529 plan, income restrictions apply and a CESA is more limited when it comes to age — contributions must be made before the beneficiary reaches age 18 and withdrawals must be made before the beneficiary reaches age 30, unless the child is a special needs beneficiary.
3. Cash value life insurance
A less familiar yet efficient way to save for college — that’s growing in popularity — is cash value life insurance. Not only does it provide important financial protection, if structured properly a portion of the policy cash value may be tapped for educational purposes by making a withdrawal or taking out a loan — or some combination of the two.
Withdrawal or taking an unpaid loan against your policy will decrease the death benefit (the sum of cash that the insurance company pays to heirs).
Contact your advisor
For a complete assessment of these savings vehicles and more, talk to your advisor.