Saving For Education
You know you need to start saving for your children’s education,
and you’re starting to get a good idea about investments to use
and those to avoid. But do you know which account you want to
use to hold these investments?
A CESA is an investment vehicle designed to help parents fund their child’s education. Contributions to the account are
taxed, but earnings used to pay education expenses are not.
The account is transferable among family members. However, there are
several restrictions attached to this account. The entire account
has to be disbursed before the beneficiary's 30th birthday, and
any withdrawals after this date or for expenses that do not qualify
under the act will be subject to income taxes and a penalty. (Text cited from InvestorWords.com.)
The 529 is a state-sponsored program designed to help parents finance education expenses. Section 529 plans are administered
by certain investment companies and subject to contribution requirements
and investment guidelines. Withdrawals from the account are taxed
at the child's tax rate, and anyone can contribute to a Section
529 plan regardless of their income level.
The proceeds can be used only for education withdrawals, as non-educational
purposes trigger taxes and a 10% penalty. The investment company
administering the account will be in control of how the money
is invested, and will charge an ongoing free for its services. (Text cited from InvestorWords.com.)
Many times, parents/guardians choose to open these taxable brokerage
accounts as a matter of flexibility: they can make an unlimited
amount of contributions; they can withdraw an unlimited amount
of assets; and, should the child not need the dollars for education
expenses—due to scholarships, a choice not to attend a post-secondary
school, etc.—parents/guardians can withdraw/use the funds for
alternate purposes without penalty.
Many times on the radio, you’ll hear us suggest different investing
strategies to parents wanting either to start saving or paying for their children’s education. Different funds
may be recommended or a particular allocation may be offered as
more specific suggestions for the process of saving for college.
But what about the general concept of education savings?
Think of an education savings portfolio as a four-piece pie:
One piece (25%) is the parents. Accounts are opened, allocations
are built, funds are selected and purchased, and contributions
are made all within this particular piece of the savings pie.
The sooner all of these things start to happen, the better. Why?
Because it gives the money a chance to grow and compound over
a much longer time period—18 years (starting when the child is
born) as opposed to 2-3 years (when the child is in high school,
about to enter college).
One piece (25%) is the child. Although they can’t open an investment
account on their own, kids can still save on their own. Using
anything from piggy banks to savings accounts, kids can save a
portion of their allowances, birthday/holiday gifts, paychecks,
etc., and put it towards their future education. Again, the sooner
the child saves, the better—it’s easier to save more over a longer
period of time than it is to cram years and years of savings into
an 18-month period.
One piece (25%) is scholarship money. Scholarships can come in
all shapes and sizes: athletic or academic; tuition gifts from
local/regional civic organizations, corporations, the military,
etc.; even local chamber of commerce monies. Not every child may
qualify for each and every scholarship, but with some planning
and a bit of work, those available dollars can be identified.
One piece (25%) is student loans or financial aid. This form of
aid must be repaid, with interest. Pell Grants, Perkins Loans,
Stafford Loans, and work-study programs are all examples of aid
available from the federal government. Loan/aid programs exist,
too, at the state and local levels. Before you can apply for these
programs, however, you’ll need to complete and submit the FAFSA
form—the Free Application for Federal Student Aid.
Something else we frequently mention is the 10-10-80 rule.
It’s not so much a rule as it is a mindset or a way for children
to start thinking about money and savings. What sounds like something
that could be a rather intense algebraic formula is actually a
very simple series of percentages:
- 10% to giving
- 10% to savings
- 80% for living expenses
And that’s it! 10% to savings can add up over a good number
of years. As with anything else, the earlier you start saving,
the better. Begin, and the rest is easy!
One of the best sites Denny’s found for a good collection of cost
calculators is www.finaid.org/calculators/.
On this page, you’ll find cost and savings calculators as well
as programs designed to help you with needs analyses and planning
for different types of loan payments/repayments.
