From Diapers to Diplomas: A Timeline for College Planning
There’s no feeling quite like dropping your college freshman off for their first semester. The energy on campus is electric, the dorm halls are packed, and you can’t wait to see what adventures lie ahead for your young adult. On a day like today, feeling financially prepared for the costs of college makes all the difference.
But preparation doesn’t happen overnight. In fact, the earlier you begin saving, the easier it is to meet your college planning goals. Here’s how to get started and feel confident at every stage of your child’s life.
Newborn: Building a Plan
When you’re still settling into parenthood, college feels so far, far away. But as any parent learns early on, time flies fast when it comes to watching your little ones grow up. If you’re committed to helping your child cover the future costs of college, you need time on your side.
Working with a financial professional, decide how much you can set aside each month, year, or quarter for college savings. Then, determine what type of account, or combination of accounts, make sense for you and your family. A few common options include 529 plans, UGMA/UTMA accounts, and bonds.
Option #1: 529 Plans
A 529 plan is by far the most common vehicle used to help families save for college. These investment plans are state-sponsored and provide participants with some notable tax advantages. For starters, most states allow contributions to be deducted at the state income tax level.
Since 529 plans were specifically developed to help families save for college, withdrawals made for qualifying educational expenses are not subject to federal or state income tax. However, if money is used for non-qualifying expenses, the withdrawal is subject to income tax with an additional 10% federal tax penalty.
Earnings that grow in the account are tax-free as well, which means many participants benefit from a triple-tax advantage by using 529 plans.
Should your child choose to go a different route than the traditional four-year college, 529 plans do offer some flexibility. Funds can be used for:1
- K-12 school tuition
- A one-time payment of up to $10,000 on student loans
- Registered apprenticeship programs
Option #2: UGMA/UTMA Accounts
Uniform Gift/Transfer to Minor Accounts (UGMA/UTMA) are a college savings option that provides a bit more flexibility for parents, grandparents, and family members. Essentially, these are brokerage accounts that stay under the name of a child’s parent or family member until the child becomes an adult.
UGMA/UTMAs offer more investment flexibility than 529 plans, since the custodian can invest in ETFs, mutual funds, stocks, bonds, etc. In addition, withdrawals are not limited to college tuition or educational expenses. Once your child has access to the account, they can use it as they wish.
In return, there are no tax benefits associated with UGMA/UTMAs like there are for 529 plans. Once the account has transferred ownership to your child, all income from the account is reported on their own tax return. If you plan on helping your child file a FASFA®, keep in mind that UGMA/UTMAs must be counted as student assets and may reduce their financial aid.
Option #3: Bonds
Some grandparents and other family members might want to give your child a bond, like an I Savings Bond. I bonds have grown in popularity recently because they’re adjusted for inflation every six months. The advantage of I bonds, which are bought from the TreasuryDirect, is that they have an education tax exclusion. When the bond owner pays for qualified higher education expenses, the payout is tax-free.2
Teenager: Making Decisions
Before you know it, you’ll have a high school junior ready to tour campuses and pick a major. The to-do list feel long, but staying organized and focused on the full financial picture can help keep your family organized during this time.
You and your college-bound kid need to discuss the factors that will impact college costs:
- In-state or out-of-state?
- Private, community, or public school?
- Within driving distance or across the country?
- On-campus dorms or off-campus housing?
College tuition varies greatly depending on where your child wants to go. From there, you’ll need to account for other expenses like travel, housing, food, books and supplies, technology, extracurriculars, etc.
It’s tempting, but try not to panic. Remember, you’ve been preparing for this since they were in diapers, and there are financial resources available for you and your child.
To begin, help your student find scholarships to apply to. The more, the better. Look at opportunities through the state, local businesses, community organizations, and the schools they plan on applying to.
If you’re applying for federal student aid through the Free Application for Federal Student Aid (FAFSA®), check with your state and school guidelines. Many universities have their own student aid deadlines for accepted students.
College Freshman: Finding Their Footing
One of the best things you can do for your college freshman is to speak to them about money. Will you be covering the cost of room and board, or are they going to work a part-time job to help pay for these additional expenses? Many universities offer students a work-study program, where they can work on campus to bring in some extra cash.
Help them understand the importance of a budget. If you’re giving them an allowance for the semester, what costs will they need to cover? Does your student have a credit card? Many credit card companies target college-age students with tempting offers. Make sure your child understands how they work, what a credit score is, and how interest accrues.
Most of all, be patient and supportive. Financial literacy is rarely taught in grade school, so this might be your child’s first real-life experience managing money. Help them however you're comfortable, and encourage them to ask questions along the way.
Remember, You’re Not In This Alone
Saving for college can feel like a monumental task, but starting early and staying organized helps ease the burden. Whether your little one is still learning to crawl or preparing to walk across the stage at graduation, there are things you can do now to prepare for the costs of college.
Feel free to reach out to us anytime, we help families incorporate college planning into their greater financial life.