Five Ways to Pay for College
As a Wealth Advisor I work with many families that include children of all ages. In doing so, I have noticed that college planning considerations are often placed on the backburner, and oftentimes not addressed until the first year of high school. Interestingly, there are some key college funding strategies that could (and should) be addressed earlier in a child’s life.
FAFSA (Free Application for Federal Student Aid) is applied for in October of your child’s senior year of high school. By then, you are no longer saving for college; you’re figuring out how to pay for it. When time is on your side, saving becomes a more powerful tool.
Here are 5 college funding strategies to consider.
1. Student Loans. Student loans are an opportunity for students who cannot pay out of pocket for their education. Your completed FAFSA application will give you an idea of the types of student loans you’ll qualify for. These look different for everyone and come at all levels of funding and expense.
2. Prepaid tuition plan. You pay the price of tuition now for your child to go to college later. There are limitations but when you consider what college cost in 1960 versus 2022 it is important to note this option.
3. 529 savings account. This is an investment account with education as the goal. There are no annual contribution limits, and a contribution is considered a gift. For 2022 you can avoid the gift tax by contributing up to $16,000 per donor and per beneficiary. This money grows tax free as long as it’s used for college expenses so it’s more powerful the earlier you open it. And there’s a bonus - some states will offer tax incentives for contributing to these plans.
4. Roth IRA. You can use your Roth IRA to pay for college without penalty. However, it is important to note that distributions are counted as untaxed income on the following year’s FAFSA which could affect the qualification of some student loans. You are also reducing the Roth IRA, which is a powerful retirement savings vehicle.
5. Scholarships. Up until now we have addressed parents. Next, we speak to the future college student. Scholarships are a great way to minimize or eliminate the cost of college. These can be merit based or needs based or simply because you asked-based. Taking the time to research and apply for scholarships can translate into significant savings when it comes to your college expense. Do not underestimate your ability to win scholarships and fund your education – If you don’t ask for it, you will not receive it.
At Copper Leaf Financial we guide many clients through the college funding process. We know how to manage college costs, increase aid eligibility, determine appropriate savings plans, and generally make the process as affordable and comfortable as possible. Call us today at (802) 878-2731 to schedule a complimentary strategy session.
Resources:
https://www.savingforcollege.com/article/can-a-roth-ira-be-used-to-pay-for-college
https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax