College Costs: What’s a Parent to Do?

Aug 9, 2018

Whether it’s the moment you first hold your newborn in your arms, send her off to preschool, or watch him cross the line in a kindergarten relay race, every parent faces this daunting realization: College is going to cost a BUNDLE! How are we ever going to afford THAT?

For decades, the cost of college has been increasing at a rate higher than inflation. While overall tuition rate hikes have begun to slow in recent years, the price tag is still pretty steep. According to collegedata.com, a “moderate” college budget for an in-state public college for the 2016-2017 academic year averaged $24,610. So what’s a parent to do?

Just say Y.E.S.

(Y) You. Before you make contributions to an education savings vehicle, you should ensure that your own financial house is in order. Are you actively saving for retirement? Do you have an emergency fund in place? Remember: You can borrow for college, but you can’t borrow for retirement!

(E) Expense expectations. Once you’re taken care of, you can focus on saving for your child’s education.

(S) Savings. Finally, set aside some money in a traditional savings account. This bucket can help offset costs that might not qualify as educational expenses under an education savings plan.

How much should I save?

The amount you’ll need to save for your child’s education can vary greatly depending upon several factors. Here are some key questions to help you calculate that number:

  • What school(s) is your child considering attending and what is the current annual attendance cost?
  • At what rate do you expect college costs to increase annually?
  • How many years do you have to meet your savings goal? Will you continue saving while your child attends college?
  • What percentage of the cost will you cover? What percentage will your child contribute?
  • What is a realistic expectation for your annual investment return?

Once you’ve answered these questions, you’re ready to determine the best type of savings vehicle to use for your child’s education funding.

What’s a 529 Plan?

The most common way to save for college is a 529 Plan, an education savings plan operated by a state or educational institution. Every state now offers a 529 plan and each is unique to the state that administers it. The plan funds can be used at any accredited U.S. college or university and even some foreign institutions.

529 plans have numerous advantages over other college saving plans, including:

  • Qualifying expenses include tuition, room and board, books and other fees related to post high-school education.
  • Investments grow tax-deferred. You don’t have to pay federal or state income tax on distributed funds used for qualified college costs.
  • The named beneficiary has minimal to no rights to the funds within the plan. The account owner retains control of the account and determines when withdrawals can be taken and for what purpose.
  • Everyone is eligible. There are no income limitations or age restrictions.
  • The 529 Plan is considered an asset of the parent/account owner when determining eligibility for federal financial aid. This is beneficial when applying for student aid, as the 529 Plan’s dollar value carries less weight if not owned by the student (5.6% or less versus 20%).

Benefits of the Indiana CollegeChoice 529 Savings Plan

Indiana’s 529 Plan has some additional advantages, including:

  • Accounts can be linked to the Upromise rewards service. As you earn money back for things like dining and shopping online, you can add any cash back earnings to your 529 Plan.
  • The minimum contribution amount is $25.00.
  • There are no Indiana residency requirements; however, non-Indiana residents are subject to a $20 annual maintenance fee. The fee is waived for accounts valued at $25,000 or more.
  • Indiana taxpayers are eligible for a 20 percent state income tax credit for contributions made to the plan. The maximum annual credit is $1,000 per taxpayer and there is no carryover.

The costs associated with saving for your child’s education can come with quite a bit of sticker shock. Just remember, preparation is the key. Your planner at Bedel Financial can help you determine the best account for your individual situation. Visit our 529 Resource Center for more info.

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