Financing College for Your Child

Funding a child’s college education is one of the biggest expenses you will have in your lifetime, so it is never too early to start planning and saving. Just make sure that you are doing so in the smartest way possible and that you aren’t sacrificing equally important things, such as saving for your own retirement.

            Here are three tips to keep in mind when saving for a college education:

  • Make sure that you are realistic when determining the amount you will ultimately need to save for a child’s education, particularly if college is still many years away. Rising costs for the average college or university have historically exceeded inflation for the past several years.
  • If financial aid plays a part in your plans for financing a child’s higher education, you need to be mindful of your Expected Family Contribution (EFC) and how it will impact the amount of aid your child will ultimately be eligible for. The EFC is a barometer of your family’s overall finances and is the amount that colleges and the federal government expect you to be able to contribute to your child’s education. The amount of your EFC is determined using a formula set by law and is only applicable to those students living in or citizens of the United States and Canada. If you are interested in determining what your EFC is likely to look like, you can use online calculators such as the following: https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/expected-family-contribution-calculator

To save for a child’s college education can take many forms, and 529 qualified tuition plans are among the most popular because of their federal tax benefits. Though it is possible to withdraw money from a Roth IRA for college expenses without incurring a penalty, doing so will open you up to having to pay income tax on whatever portion you withdraw that is related to earnings generated within that portfolio. In the case of a 529 plan, however, so long as the money you have invested in the plan is used for “qualified education expenses,” such as tuition or room and board at an accredited U.S. institution, any earnings generated within that account are tax-free. Depending on what state you live in, you may also receive state tax benefits for investing in a 529 plan.

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