How to Save for College Education

Mia A. McFadden, CFP®

With college costs soaring many parents are left scratching their heads over how to save for their child’s college education. We know that obtaining a college degree can result in higher pay and a wider array of career opportunities.   But what we really hope a college degree translates to is a better quality of life for our child; a house, a family of their own, the picket fence, a dog named Fido. But how do we as parents contend with rapidly rising college costs?

The best strategy for many is to start planning and start saving early on in your child’s life. Maybe you know you should start saving, but you wonder if investing a small amount of your extra income will make a difference. As it turns out investing a smaller amount earlier on and adding to it over time can often produce better results than a single larger amount invested later in life. But where do you invest your money? It’s not going to grow by stashing it under your mattress and savings accounts provide dismally low returns.  A viable option that has gained popularity is the 529 plan. The 529 plan is specifically designed to provide you with benefits while saving for and spending on college.

Here’s how the plans work. The 529 allows you to choose from a wide array of investment options, allowing for potential growth. Each 529 Plan has an account owner, usually the parent, and a beneficiary. The owner or parent controls the money held in the account and can change the beneficiary to another family member. So if your oldest child decides not to go to college, you can change the beneficiary to your younger child. In Pennsylvania taxpayers can deduct up to $15,000 of their contributions per beneficiary per year (or $30,000 if married filing jointly) from their state tax return. These contributions grow tax deferred and distributions from the plan for qualified college expenses are tax free. However should you have to distribute funds for non-qualified expenses you will be taxed and assessed a 10% penalty on the growth.

A word of caution. Although parents may want to prioritize their child’s future, they should not do so at the risk of jeopardizing their own future. Parents paying off their own student loans and high consumer debt, struggling to save towards retirement or struggling to build up emergency funds should prioritize planning for themselves. It’s best to consult with a Certified Financial PlannerTM to figure out which goals are realistic and to advise on how those goals can be achieved.

Mia A. McFadden, CFP®

Vice President

Financial Consultant