The DO’s and DO NOT’s of Saving For College 

saving-for-collegeDO start saving for college as soon as you can, but DO NOT let those savings interfere with your other financial priorities.

In today’s competitive economy, a college degree has become almost essential for a middle-class lifestyle. At the same time, the cost of college has multiplied to outrageous levels. What cost a few thousand dollars in the seventies now costs tens of thousands of dollars per year.

But until that changes, many parents who want their children to have that chance at a comfortable life (and what parent doesn’t?) will have to find some way to tackle the incredible costs of a college education.

If you have or are planning to have kids you probably want to help them start their professional life in the most advantageous position possible, and that could mean starting a college fund. But how can you do that when you have enough trouble paying for things in the here and now?

DO NOT put saving for college ahead of your other financial priorities.

Before you can worry about the future, you have to worry about the present. And that means figuring out how you can balance the vital needs of the now with the needs to come.

“Many people want to start planning for their newborn child’s education right away and, if that is possible, I think it is fantastic,” said Laura Morganelli, CFP and financial advisor for Abacus Wealth (@AbacusWealth). “However, when working with clients, I want to make sure that they are setting themselves up for overall success and not just focusing on one specific goal.

“Most people have been on a plane and watched a flight attendant go through the safety instructions. One of those being, in the event of an emergency should the oxygen masks be released, to put your own mask on before putting on your child’s mask. The same can be said for financial planning. Before I suggest starting to fund an education plan, I want to make sure an emergency fund (3-6 months worth of expenses) is in place and a plan of action for saving for retirement has been discussed.

(To read more about the importance of emergency savings, check out our blog post: Want to Avoid No Credit Check Loans? Build an Emergency Fund.)

“More often than not, a discussion of prioritizing goals is the best way to determine when to start funding a child’s education fund. Saving excessively for education goals and letting retirement fall to the back-burner may mean working longer than you may have hoped. Understanding how every decision affects other aspects of your financial life up front is the best way to proceed the correct way.”

DO NOT put saving for college above saving for retirement.

Daniel Brown (@danielbrownsf), founder of Miles Brown Asset Management, offered similar advice about having to look out for your own financial needs. He put particular emphasis on saving for retirement:

“Parents and grandparents are often eager to ensure that their new bundle of joy has the resources they need to pursue their dreams as they get older. The problem is that they make saving for the child’s education a priority and they forsake the need AND responsibility to save for their own retirement. I often make the following comment or some variation of it: ‘There are scholarships, grants, loans, and financial aid available to a student who wishes to pursue higher education. However, aside from Social Security, there are no scholarships, grants, loans or financial aid provisions available for your retirement’

“The point being is that while you should begin saving for a child’s education as early as possible, that particular savings goal should be subordinate to your family’s emergency fund and your own retirement savings plan. Most Americans can save at least $5,500 in either a traditional IRA or in some cases, a Roth IRA. If their employer provides for it, they may also save up to $18,500 in a 401(k). At the very least, if their employer provides a 401(k) match, they should be contributing enough to secure the full match. Often, these steps are NOT being taken when the query concerning saving for college is made.”

But let’s say you have your own finances in order. When should you start putting money into that college fund?

DO start saving for college as early as you can.

As with most things you have to save for, the sooner you can comfortably start, the better. And this can be all the more true when it comes to saving for college.

The easiest way to save money for college is to open up a 529 College Savings Plan. These are investment accounts designed for the express purpose of, well, saving for college—just like the name says. These are state-sponsored plans, so the details can vary depending on where you live. You can head on over to the SEC’s website for more information

“In most states, especially California, the primary benefit of funding a 529 College Savings Plan is to accrue earnings (growth) in the fund so that when the beneficiary begins to withdraw for higher education expenses, the accrued earnings can be withdrawn on a tax-free basis,” advised Brown. “In order for significant earnings to accrue, in general, one must allow time for the portfolio to grow and unless a lump sum is being contributed, there needs to be time for regular systematic contributions to be made. The earlier you begin saving, the more earnings may potentially accrue over the beneficiary’s time horizon.”

It’s also important to start early since you’ll likely be putting away relatively small amounts. Since you still need to eat and pay rent, the actual amount you’ll be putting away in the savings plan will only be what you’re able to. You should consider taking steps like meal planning so you’re spending less on the essentials.

(To learn more, check out our blog post: Bad Credit Helper: How to Save Money Through Meal Planning.)

DO look at saving for college using other types of accounts.

But you’re reading this on the internet. So it’s only fair that we offer you One Weird Trick.

“Typically, a Roth IRA is thought of as a retirement savings plan,” Jacob Dayan, CEO of Community Tax (@communitytaxllc), told us. “If you choose to withdraw money before reaching the age of 59 and a half, most of the time you would pay a 10% early distribution penalty on the amount you’re taking out. However, it is a little-known fact that if you are withdrawing money for the purpose of paying for higher education expenses, you do not have to pay the 10% early distribution penalty. This turns a Roth IRA into a great vehicle for saving for your child’s college fund. It is important to note that you will have to pay any deferred income tax that is due, as with any IRA withdrawal, but the 10% penalty is waived.”

Whew! Did you get all that? Much of that advice could likely help you even if you’re some other sort of relative looking to help pay for an education, whether you’re a stepsister or a cool uncle.

Paying for college can be intimidating. But if you wait too long, you’ll only be more stressed when the time comes. It’s also important to consider which higher education option might make the most sense for your child, but that’s a discussion for another time.

To learn more about saving money for the future, check out these related posts and articles from OppLoans:

What are your college savings strategies? Let us know! You can email us or you can find us on Facebook and Twitter.

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Daniel Brown (@danielbrownsf) is a financial planner in the SF Bay Area. He owns a registered investment advisory firm, Miles Brown Asset Management.
Jacob Dayan is the CEO and Co-founder of Community Tax (@communitytaxllc), a finance and accounting company based in Chicago.
Laura Morganelli is a Financial Advisor and CFP® in Philadelphia. She focuses on helping young professionals define what financial success means to them and provide the structure to achieve it. She often works with young families to create good habits that will help them achieve financial success.

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