Nearly every parent I meet has a financial goal of funding – at least a portion of – college for their kids. There are a lot of vehicles to save for this expense, but oddly enough, the issue I see most often is clients over-funding plans for higher education while under-funding plans for retirement. As a new dad myself, college costs are high on my priority list, and we’ve wasted no time starting to save for our 6-month-old daughter. However, as a wealth advisor, I counsel clients that flexibility in a savings strategy is the smartest way to pay for college.
From one parent to another, here is the plan my wife, Natalie, and I put in motion for our Ella.
- Open a 529 Savings Plan. Most people are familiar with 529 plans, which are tax-advantaged vehicles to save for education. Your original contributions to the account may be free from state taxes, and all gains that result from accruing interest are free from federal and state taxes if used for qualifying education purposes. Be cautious, however, not to over-fund 529 plans because once you’ve paid for educational needs, you’ll pay tax and a penalty on the gains when funds are used for another purpose.
- Start a more flexible investment* account. In addition to Ella’s 529 plan, we created an account under the Uniform Transfer to Minors Act. This takes the place of a traditional savings account for her, but parents remain in control of UTMA accounts until the child turns 18 – at least in Oklahoma. The termination age varies by state. Unlike 529 plans, UTMAs allow flexibility to use the funds for non-educational purposes, such as Ella’s first car, her wedding, a down payment on a house, etc. However, because it’s an investment account, tax must be paid on the growth regardless of how funds are used.
- Commit to a goal. We’ve set a goal to pay for four years of college at an in-state university for each of our children. We know what those costs are today, and by using schools’ estimator tools, we can calculate roughly what they will be when Ella graduates high school. When she’s old enough to start thinking about college, we’ll communicate this commitment to her but allow her to apply our funds toward a private or out-of-state school of her choice. The additional costs, however, would become her responsibility.
- Fall back on student loans. Many people are scared to incur loans, and with the student-debt crisis in our country, I understand. No one wants to launch their student into the working world with huge loan payments, but once you’ve exhausted all financial aid and scholarship options, student loans are a perfectly responsible way to pay for college. If they’re able, many parents pay loans off on the student’s behalf after successfully obtaining a college degree or if GPA goals are met. However, make sure your children understand these expectations ahead of time. Remember, you can take out loans to pay for education, but you can’t take out loans to retire. So, making sure you and your spouse’s retirement needs come first isn’t selfish; it’s sensible.
When it comes to saving for college, do your research. Explore your options. But also, take advantage of the knowledge and experience of a licensed financial advisor*.
Aaron Waters is a wealth advisor for Wymer Brownlee Wealth Strategies. He joined the company’s Enid office in 2010 and now operates from its location at Portland and Memorial in Oklahoma City. Aaron obtained a Bachelor of Business Administration in financial management from Abilene Christian University. He loves golf, fishing, music and travel – but nothing more than his wife, Natalie, and daughter, Ella Kate.
*Aaron Waters, Registered Representative. Securities offered through HD Vest Investment Services®, Member FINRA/SIPC. Advisory services offered through HD Vest Advisory Services® Insurance services offered through HD Vest Insurance Agency, LLC. 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000. Wymer Brownlee Wealth Strategies is not a registered broker/dealer or registered investment advisory firm.