Forward Bank

Remember when a college education was reasonably priced? In the past 20 years, the cost of college tuition for public universities has risen 165%. College students and their families have been taking on more and more debt, and they are taking longer to pay it off. Recent data bears this out. In 2021, 34% of adults aged 18 to 29 years have student loan debt, making them more than twice as likely as adults in any other age group to have student debt.^1,2

It is never too soon to begin saving for your child’s education. Many parents start as soon as a child is born. Some parents begin preparing before their children arrive. If you plan on having a family “someday,” it may be smart to start preparing now. If your child is already in high school, you may feel it is too late to start saving for college, but there’s still hope. If you are in a time crunch to save, begin thinking about ways to manage your monthly expenses and increase your cash flow now.

What about your retirement? While you may feel that putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college. Remember that student loans are federally available. While you may not want your child to assume such a financial burden, you could always help with repaying the loan later. Also, by giving your child that responsibility, they may experience a greater understanding of, and appreciation for, the value of their education.

You need a break. A tax break, that is. Many higher education savings vehicles can provide one, such as 529 plans and Coverdell Education Savings Accounts. A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. State tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. Also, consider the fees and expenses associated with the particular plan. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may be different than federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

Contributions to Coverdell Education Savings Accounts (ESA) aren’t tax-deductible, but the accounts allow individuals to save for education expenses on a tax-advantaged basis, subject to limitations. Contributions to a Coverdell ESA aren’t tax-deductible, but the account accumulates on a tax-deferred basis. In addition, withdrawals are not taxed as they are used for qualified education expenses. Finally, contributions may be made until the account beneficiary turns 18. However, the money must be withdrawn when the beneficiary turns 30, otherwise taxes and penalties may occur.

There are also other alternative educational paths to consider. For example, would your child be willing to complete their first two years of higher education at a community college, then move on to a preferred college or university later? The tuition is often much less at a state community college, and you could realize additional savings if your child attends school while living at home.

The simple fact is the sooner you plan, the better. If you have not begun preparing, start now – there is no better time to get the proverbial ball rolling. You may be surprised how a little preparation now can make a big difference in the years to come. If you would like to speak with a financial advisor about your child or grandchild’s education, please feel free to contact us.