Saving for College 101

College is an investment in your child’s future that could pay for itself … eventually. Until that time, it’s an expense that often strains a family’s budget.

So what’s the best way to manage education costs? Consider these planning pointers.

1. Saving some is better than saving none

With today’s college costs, saving the entire amount your child will need may be unrealistic. Avoid using this as an excuse to not save at all. Remember, the earlier you start to save (even a small amount), the more time your money has to grow and compound.

2. Saving costs less than borrowing

Some parents fear saving for college hurts their child’s chances for scholarships and financial aid. The truth is most scholarships are merit-based. While grants are available (and you should definitely check into them), financial aid for many kids means getting a loan.

Any amount saved is that much less your child will need to borrow. Plus, because of interest rates, the loan likely costs more in the long run.

3. There are many different ways to save

You have a variety of options. One type of plan specifically designed to encourage saving for future education costs is a 529 college savings account.

All types of families can contribute to a 529 plan, regardless of income. However, the total amount you can save varies by state. The money will grow tax-deferred and can be withdrawn tax-free if used for qualified education expenses. Some states also offer tax credits, deductions or other incentives. (Consult your tax advisor for more information.)

In addition to college costs, these plans can be used for apprenticeships, vocational programs and even K-12 tuition (up to $10,000 per year). You can also use a 529 plan to pay off some student loan debt (up to $10,000 total). And as the owner, you maintain control of the plan and can change beneficiaries as desired.

4. You could save for retirement and college with one plan

You don’t have to choose between college and retirement savings goals. A Roth IRA can help you achieve both goals simultaneously. For families that qualify, consider fully funding Roth IRAs for both parents.

• It allows your family to save up to $12,000 ($6,000 for each parent under age 50) per year. Parents over age 50 can save up to $7,000 each per year.
• You can withdraw part or all of these contributions to pay for college without income tax consequences or penalties from the IRS. Your earnings can remain for retirement.
• If you’re over age 59½ and have held a Roth IRA for at least five years, you can withdraw your earnings as well without income tax consequences. (Note: If you’re younger than 59½, the 10% penalty from the IRS does not apply on earnings you withdraw for qualified college expenses. However, your earnings will be subject to ordinary income taxes.)
• Parents maintain control over the funds.
• If your child doesn’t need the funds for education, you can keep the money growing for retirement.

Note: Taxable distributions from a Roth IRA could affect the FAFSA and your tax returns. Consult your tax advisor for more information.

5. Making your kids help is good

Consider making your children responsible for at least some of their education costs. When they have some skin in the game, they may take their college experience more seriously.

How much skin needs to be in the game? Some parents share the cost 50-50. Others ask their kids to be responsible for a specific aspect of their higher education – “You pay for tuition; we’ll pay for room and board.” It’s really up to you, your family budget and your parenting philosophies.

It’s also important to talk to your kids about college and future career goals at an early age. Many great careers don’t require a college degree. Some young adults may be better in vocational training or a trade apprenticeship.

6. Life insurance can protect your plan

In addition to emotional upheaval, an unexpected death can put a wrench in a family’s financial planning … including college savings goals. Life insurance can help even if you’re no longer around. Your child could use the income-tax-free death benefit to pay for education costs.

7. Scholarship applications are worth the time

Work with your child to research the wide variety of scholarship opportunities out there. Pay attention to deadlines and encourage your child to apply for as many as possible.

Modern Woodmen awards $450,000 each year through Make An Impact® Scholarships. This scholarship competition recognizes hard work and volunteer service, and it’s exclusively for Modern Woodmen member students. (Hint: Much better odds of winning than many other national award programs! Only 10% of eligible members apply each year.)

Annually, 198 graduating seniors win up to $10,000 for higher education. Applications are open from November through early February.