Financial planning for college is becoming ever more important as the higher education required to succeed becomes more and more expensive.  According to the Department of Education,  the cost of college is outpacing inflation and wage growth.  Student loans account for more personal debt than credit cards.  And by 2030, the average public university tuition for a 4-year degree will cost $205,000 (and that’s just the tuition).

It’s not a pretty picture – but it looks much, much better when you create a personalized financial plan for college.  We asked Jimmy Stechschulte, one of the financial planning and college planning analysts at THOR Investment, to share some of the most important – and possibly overlooked – factors that families should consider in any financial plan for college.

1)  Start investing for college early.
Perhaps so many people overlook this advice because it seems so obvious.  Still, you have no greater ally in paying for your child’s college education than time – which means that it’s never too early to start.

2)  Remember, not all 529 plans are created equal

All 529 plans  – which are offered by individual states – let your college savings grow free from federal and state tax.  However, not all states give you the same tax advantages and a good financial advisor can help you determine which plan is best for your situation.  As Jimmy notes, “we first look at which plan offers the greatest tax advantage. Kentucky, for instance, gives no state tax break, whereas Ohio does.  Then we assess which 529 plan is structured for the best potential for growth given their fees and investment options.”

3) Learn why an ESA can be an E-A-S-Y way to pay for education

Many people are surprised to find that there are other tax-advantaged saving options for college beyond the 529 plans.  The Educational Savings Account, or ESA, has lower annual contribution limits than a 529, but the funds may be used for either college or for pre-college private school education.

4)   Don’t forget college financing resources that are right under your nose

Beyond the 529 plan and the ESA, it’s important to remember that you may have financing options other than burdensome student loans.  For instance, insurance plans –specifically permanent cash policies – can often be drawn against tax-free.  Additionally, withdrawals can be taken from IRA accounts for qualified education expenses without incurring the 10% penalty in many cases.  Such withdrawals, however, can be a very tricky business, with significant impact on retirement, and should be thoroughly discussed with your financial planner or wealth management firm.

5) Financial Aid Considerations

Importantly, any savings by parents into retirement accounts (IRAs, 401(k)s, etc.) is not counted against the student when applying for aid.  The formula for calculating aid excludes these account values.  The more you save into qualified accounts, the more aid you will potentially receive when your child submits their application.  On the flip side, savings in the child’s name can potentially reduce the amount of aid awarded.

6)   Make Your Child Part of Your Financial Plan for College

Finally, from both a financial and an educational perspective, it is important to involve your child as an active participant in their financial planning for college.  Whether your child is starting an investment plan or opening a simple savings account, the discipline of investing and the commitment to participate in paying for college yields dividends on the balance sheet and their report card.  In fact, one study shows that the more students contribute financially to their own education, the better their grades.

What’s your financial plan for college?  Unless you have one, it’s time to talk to someone from THOR.

Suggestions for further reading:

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