Every year, as summer approaches, hundreds of thousands of high school students turn their tassels from the right to the left side of their motor board cap then throw it up in the air and call themselves “done.”
A few weeks prior, not quite as many college students do the same. The endless loop of “Pomp and Circumstance,” the pride, the tears—the ritual of graduation is played out year after year.
If you’re the proud parent of a high school graduate, and your child is going off to college, the chances of you being worried about how you and your newly graduated child is going to pay for it are probably pretty high. If you are the lucky parent of your now-grown child moving off into the world after college, you look at the reality of the situation—a stagnant job market and the specter of student-loan payments looming all-too large.
Parents want the best for their kids. We want them to be happy and successful—and hopefully that includes a decent paying job. That’s why many parents still encourage their kids to get a higher education. College graduates still tend to make more money than those with high-school diplomas.1
But college is expensive and getting more so. According to a report by CNBC, college tuition prices have been rising 60 to 80 percent higher than the cost of other goods and services, like apparel. Or, to put it another way, between 2000 and 2013, the average level of tuition and fees at a four-year public institution rose by 87% (in 2014 dollars), but the median income for the middle class rose just 24%.2
If you haven’t planned for it, it can knock your financial socks off. It can leave your child in an enormous amount of debt if the only recourse they have to pay for tuition is student loans.
So how to offset that? There is the much-talked about 529 plans, a government-controlled qualified plan to save money for your child’s education. The tax consequences of this type of plan are a bit complicated, and you should talk to a qualified accountant, broker, or even a tax attorney to know the ins and outs of how that works. I do know, generally, speaking, that the money you put into this account is not “pre tax” money, meaning your contributions to this plan are not tax deductible like a retirement plan.
However, it does grow income-tax free, and if it’s withdrawn correctly to pay for a college education for your children, you won’t be required to pay income taxes on it then either.3
As far as savings plans go, that’s sounds pretty decent. Most types of savings plans you have to pay taxes—either income tax or capital gains taxes on the money as you make it. Take mutual funds for example. The interest you earn will be subject to annual income tax and you will have to pay a capital gains tax when you withdraw the money, no matter what you use it for.4
But is the 529 College Savings Plan the absolute best way to go? I don’t think there are any absolutes in life. However, as an expert in alternative ways to save money, I know that there are ways you can still control the money you make while having it available to you when you need it. I know that there are viable ways to plan for college that won’t cost you tax dollars and that actually allow your child to finance his or her college education while still maintaining a healthy savings account.
This can be done in such a way that the savings account is not subject to the volatile ups and downs of the stock market. It allows you to grow money in a compounding environment, shielded from market risk, available when you need it, and accessible in such a way that you can take distributions without touching the principal amount. This means that the money you’ve saved can still be in the account earning interest at the same time you’re using it to pay those expensive tuition bills.
I titled this “a cautionary tale,” for a very specific reason. What I’m talking about really is for parents who have young children. They need to think about starting a college savings account now. Those of you who have just experienced the immense joy of watching your son or daughter graduate from high school or even college, there are still ways to take advantage of this alternative way to handle money.
Graduation marks the end of an era—high school, college, or even graduate school. But almost always, an ending of one thing signals the beginning of something new.
As you think about the future for your children, think about sending them into life with a financial advantage most don’t even know to dream about.
Financial assistance can come in many ways. Giving your child a strong financial advantage before they even start college is a gift they will appreciate long after they turn in their gown and hang their tassel on their rear-view mirror.
1 John W. Schoen. “Why Does a College Degree Cost So Much.” June 16, 2015. http://www.cnbc.com/2015/06/16/why-college-costs-are-so-high-and-rising.html
2 See endnote #1