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Making the Most of Your College-Savings Program with Mark Biller
Episode 478
Today’s parents have better ways to save for their kids’ college than existed a generation ago. So, are you making the most of your college savings program?
It’s been less than 30 years since Congress authorized the tax-advantaged 529 plans. More options soon followed. Mark Biller joins us today with the pros and cons of several college-savings programs.
Mark Biller is Executive Editor and Senior Portfolio Manager at Sound Mind Investing, an underwriter of Faith & Finance.
The Rising Cost of College
Over the past few decades, the cost of higher education has increased at a rate much higher than general inflation. Today, more than half of college graduates leave school with student loans, and the average debt load has nearly doubled in the last 15 years.
For parents, saving for college can be daunting, but starting early is essential. For instance, if you have 14 years to save for a child’s education, you'll need to set aside about $520 per month to cover 70% of the four-year cost at a public institution. Waiting until your child is older will require much larger monthly contributions.
One of the most important strategies is involving your children in the savings process. Helping them understand that any unmet costs will turn into debt in the future can encourage them to contribute through savings, summer jobs, scholarships, and financial aid. This also teaches them the value of disciplined saving.
Best Programs for College Savings
While there are many options available for college savings, there are specifically three key vehicles: Coverdell Education Savings Accounts (ESAs), 529 Plans, and Roth IRAs. Each has its own strengths and weaknesses.
1. Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs offer flexibility in investment choices, allowing parents to make specific investment decisions and adjust their portfolios as needed. However, there are income limits for contributors and a maximum contribution of $2,000 per year, which may not be enough if you're starting late in the game.
2. 529 Plans
These plans have become the most popular option for college savings. They offer tax-free growth on your investments as long as withdrawals are used for qualified educational expenses. Many states also provide tax benefits for contributions to 529 plans.
While they don’t offer the same investment flexibility as Coverdell ESAs, they allow higher contribution limits and have no income restrictions, making them suitable for high-income families. Age-based portfolios, which automatically adjust investments as your child gets closer to college, can simplify the process for busy parents.
3. Roth IRAs
Roth IRAs are typically associated with retirement savings, but they can also be useful for college savings. You can withdraw contributions without penalties to pay for college expenses. However, you'll need to be at least 59½ years old to avoid penalties on earnings. Roth IRAs provide the flexibility to use the funds for retirement if your child doesn’t need them for college.
Choosing the Right Option
When it comes to saving for college, it’s not necessarily about choosing one program over another. Parents can use a combination of these accounts, such as contributing to both a Roth IRA and a 529 plan. The key is to start early to maximize the benefits of compounding. The earlier you begin saving, the less you’ll need to set aside each month.
With the rising cost of college, saving early is crucial to minimizing student debt for your children. Whether you choose a Coverdell ESA, 529 pla
Published on 1 year, 3 months ago