Published on 08-29-2019
With college costs increasing rapidly and news programs sharing stories about how college graduates are deep in debt, it's normal for parents to want to take a more proactive approach to help their kids minimize the debt they take on.
I had the pleasure of speaking with Drew Snider, CFS Financial Advisor at Coastal’s Wealth Management about how parents can financially prepare for their kid’s college fund.
Drew pointed out that one of the biggest advantages parents can have is time. Starting early, even with smaller amounts, is much better than waiting later.
One decision you need to make is where to save up for your kid’s college fund. Two popular options are 529 plan and Coverdell Education Savings Account (ESA).
With both accounts, you list your child as the beneficiary. Some big financial wins with both accounts include how the account’s growth is entirely tax-free and the withdrawals are tax-free as long as you use them for higher education.
With a Coverdell ESA, one of the biggest advantages is the flexibility with your investments.
Think of it as an IRA versus your 401(k) at work - with your IRA, you can invest it how you like while you’re more limited on choices with the 401(k) (whatever plan your employer choose).
You have more freedom to self-direct how you want your money invested with an ESA.
The contribution limit is $2,000 a year. You also need to be aware that the beneficiary needs to use it by age 30 if you don’t want to get hit with tax penalties. (You can also name another beneficiary.)
A 529 Plan is a popular option for many families because it has a higher contribution limit, currently $14,000 a year. There is also no income limit with them, unlike an ESA.
Drew also pointed out that 529 plans are established by the state, so they decide what investments are in those plans. However, you aren’t required to use your state’s plan.
He suggested some things to evaluate. “So as an individual deciding which plan to use, a couple of things you need to think about are one, do you get any tax advantages from using your state's plan?
Here in North Carolina, we used to have a tax advantage. We would get a tax deduction or a credit actually on our state taxes for contributions that ended met several years ago.
[If] you're a North Carolina resident, there really isn't an advantage from a tax standpoint to use the North Carolina plan.
Most states allow out-of-state residents to use their plans. And so that really frees an individual up to pick which states plan they want to work with.”
Working with a financial advisor can be helpful for you to see which option fits your family best.
While saving up and assisting with some of your kid’s college expenses, you do also want to make sure that you’re a financial sound spot.
Do you have an emergency fund up? Are all the high-interest debts, such as credit cards, paid off? Are you making contributions towards your retirement?
Not having those in place can put you and your family in a tight spot. There are some adults now who are trying to take care of their kids and help out their parents because their parents hadn’t saved enough for retirement.
Don’t forget that part of helping our kids is making sure they’re able to make smart financial decisions.
Besides helping them learn to budget and save, walk them through the finances of pursuing a college degree or getting certified.
Start early so they become comfortable looking over their options.
Can you go over and review in-state schools with great programs that can fit your family’s budget?
Have you considered having them using summer breaks or ‘work’ part-time to find scholarships that they qualify for?
Having them involved gives them ownership and can assist them with making the most out of their education.
Drew brought up a fantastic idea - getting a two-year degree through a community college and then transferring over to a university for their bachelor's degree.
Not only can that be a more affordable option, but transferring may increase their chances of getting into that university.
Whatever plan you decide to go with, starting early gives you an advantage.
If you’re ready to start saving for your kid’s college expenses, go ahead reach out to Coastal’s wealth management team, available through CFS*, today.
They can help you craft a plan that fits you and your family’s particular goals!
Elle Martinez is the creator of Couple Money, a personal finance podcast and site focused on helping couples get on the same page, dump their debt faster, start building wealth together
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Coastal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.