Financial Strategies to Consider During the College Years
No matter how you choose to fund a college education, you'll want to ensure you get the most from the savings you’ve allocated for this purpose. If you have children (or grandchildren) approaching college age, there are things you can do to ensure your money goes the farthest in helping your student. While much of the strategizing hinges upon how you use 529 funds, there are additional ways to maximize your investment in education.
Use Your 529 Effectively
A 529 plan is a tax-advantaged savings account that funds education expenses for the designated beneficiary. While you likely began saving in a 529 (or similar) a long time ago, there are still decisions on how to best use the funds. While there is no one-size-fits-all, we do have some recommendations to consider:
- Use Funds Early On: Keep in mind plans can change, and there is a penalty for withdrawing funds for non-qualified expenses. We see many clients delay using their 529s and doing what they can out of cash flow first. We recommend doing just the opposite. 529s are for education, and only for education, and although the path may seem set in stone now, things can change over one’s college career. In instances where a student switches majors, transfers, or decides college isn’t for them, funds could become locked up.
- Use Funds Resourcefully: What many people don’t realize is that you can use funds for items beyond tuition, books, room and board. There are a variety of other qualified education expenses (things like computers, fees, supplies), as well as off-campus housing. Transportation and travel are, unfortunately, exclusions that will not be covered by a 529. In the event your child selects a different path, the funds may also be used at any accredited public or private institution, including trade schools. There is a $10k lifetime limit for funds used to pay off student loans. The account can also be used for up to $10k/year for private primary and secondary school.
- Reallocate Unused Funds: If you don’t wind up using all of the 529, you can change the beneficiary to another family member – and there is a wide latitude of whom this can be. To avoid the risk of overfunding, many of our clients plan to fund a 529 based on expected public education costs, then divert any excess savings into a different, more flexible account in the event the student opts for a more expensive private school. In the welcome situation of the student earning a scholarship, the matching value can be withdrawn from a 529 account without penalty.
To withdraw 529 funds, you can pay the institution directly from the account or reimburse yourself. Keep in mind, that reimbursements must be made in the same calendar year as expenses, and you should establish a system for logging qualified expenses in the event of an IRS inquiry. Additionally, there is a 10% penalty (tax) on earnings not used for education.
Hire a Professional Counselor
Families who place a high value on education may find tremendous value in hiring a college-prep counselor. Counselors provide a variety of services, from process to paperwork. They can coach on essays and applications, as well as guide the student to schools that offer the best fit for their interests and goals. They also assist with obtaining the maximum amount of financial aid and scholarships. A counselor will view college as a business decision, and in doing so, take into account financial considerations you may not be considering. As you make one of the biggest investments of your life, they can help you understand the value or need for advanced degrees in chosen professions, and give insight into potential career paths for different degrees and institutions.
Establish Good Financial Habits
Helping your student establish good financial and wealth-building habits is another way to make the most of your money during the college years. This includes preparing them for the financial responsibilities of adulthood and making sure they get experience dealing with money as they mature. This can mean a variety of things — from working part-time to opening their own checking account or investing in their own brokerage or 401(k) account. Once in college, you could allow your student to have a debit card and establish a budget they must live within, transitioning the responsibility to them as they gain experience. Regardless of your approach, providing direct access to or responsibility for wealth will help your child understand the value of money and the skills to manage it.
We’re Here to Help
Richard P. Slaughter Associates is available to help with all of the strategies mentioned above. Our role goes beyond simply advising on how to use a 529. We can help connect you with college counselors and facilitate introductory meetings. If you have a child in high school, it is a great time to get these conversations started if you haven’t already. We are available as a resource throughout the process.