GC: Learn how to finance a college education
Sept. 30, 2011 at 4:30 a.m.
You've seen them on shelves, dressers, nightstands and desks alike.
Some take the form of a pink, pot-belly pig, some are just old jars while others are
mechanical and animated to drop shiny pennies into the empty cavities that yield the saving for something special. Piggybanks, whether whimsical, practical or novel, may prove helpful when saving for your child's college education.
But how many piggybanks will you need to fill, or how many will you have to fill, empty and fill again and empty again ... You get the idea, to pay for that priceless knowledge?
When gearing up to save those shiny, copper pennies and glistening, golden dollars, Registered Financial Planner Robert Mabe may be able to help eliminate some of the strain, and stress, of saving for that day when your child enters the world of adulthood.BEST OPTIONS FOR SAVING
"There's really a lot of different options for people saving for higher education," the 42-year-old planner with the Mabe Financial Group said.
"The most common is the 529 plan, which has tax advantages to it. It basically grows tax-deferred on the money that's put in there."
Investing money will, in almost all cases, carry risks. As the saying goes, "there's no such thing as a sure thing."
The 529 plan is a state-recognized investment plan that encourages saving for college education, according to the U.S. Securities and Exchange Commission website, www.sec.gov.
"With my clients, the 529 plan is the one most commonly used. Clients make deposits into it each year; it grows tax-deferred, which means no taxes are paid on it until it is pulled out so that lets the interest compound," he said. "But it has to be used for higher education, that is the key."
A father of three teens, Mabe did point out that for families with multiple children, the 529 plan comes with its good and bad points. "There are benefits for it, but you also have to understand the negatives," he added.
So, in a hypothetical case, if the oldest of two kids decides that he doesn't want to pursue a college education, parents can keep the 529 plan for the younger of the two.
However, as the plan states, there are penalty charges to consider if the second child chooses to follow in the footsteps of the older sibling and the money is used for something other than higher education.
A popular secondary option is an account designated specifically to the child.
"A UGMA, Unified Gift to Minor Account, is an account put in the kid's Social Security number for tax purposes, but clients are still the custodians for the account," Mabe said. "This is going the route that is not tax beneficial, but they still maintain control."
However, when clients do set up accounts through the UGMA way, when (the child) turns 18, the money belongs the kid."
He cautions that clients need to be mindful of the child or children they are saving for. It's important to remember that in both instances there are negative advantages to these particular saving options:
- For the 529 plan, it must be used for higher education.
- It may be tax-deferred, where no interest is paid until it is withdrawn.
- For the UGMA, once the child turns 18, that money goes solely to the child, regardless of whether he is planning to go to college.
"As parents, you do not owe your kids a college degree; you owe them the absolute best that you can do, and after that, you owe them the best you can do that is not financial. If you are able to help them financially, that is wonderful. That is great, but you don't owe that to them," Mabe said.WHEN SHOULD YOU START SAVING FOR A COLLEGE EDUCATION?
In an economy like the one we live in today, education is greatly emphasized. People are continuing to pursue higher education through online classes, returning to the classroom, taking developmental courses, and the number of students embracing it is also growing.
But as prices of tuition and living costs continue to rise, Mabe said it's never too early to begin planning for a college education.
"My recommendation, based on age, education, income, is when you decide 'I want to have a kid,' start saving," he said.
The biggest reason for this is the cost.
Delegating expenses for bills, living expenses and for saving plans can be hard.
"Probably next to a house, you're looking at the second largest expense you're going to incur. If you have multiple children, it may be the largest expense that you have," said the 20-year veteran financial planner.BE AHEAD OF THE GAME
There are endless combinations of factors to consider in the case of investing, whether it be for retirement or college education.
"The best thing to do is explore all of your options," Mabe said.
These things can aid in the process when looking for the best options for saving:
- Financial statements: records of any money that they already have saved.
- Income and expenses: A look at your current cash flow.
- A possible budget: A look at what you're doing to save money or where you can free up some money.
- Amount of debt: Something to consider for saving.
"With all of that information, we are most likely able to put some sort of plan together," he said.