Stretch your savings to help pay for college
Don’t panic when the tuition bill comes due
With high school seniors soon heading off to college, parents are faced with the daunting task of figuring out the best way to tap the money they’ve saved for their kids’ higher education. After all, they want to ensure they can stretch those hardearned dollars as far as they can.
What complicates matters when parents go to pay is not only the exorbitant cost — the average sticker price for tuition, fees, and room and board at a private college this past academic year was
$48,170, according to The College Board — but the fact that the savings are spread around in a variety of accounts, ranging from cash to stocks and in investments that are shielded from taxes and those that are not.
About a third (30%) of the savings is invested in
529 college savings plans, 22% is parked in savings accounts and 14% is sitting in investment ac-
“I always tell clients, it’s one thing to save for college. Now, you have to learn how to pay for college.” Marguerite Cheng CEO of Blue Ocean Global Wealth
counts, according to Sallie Mae’s recently released “How America Saves for College 2018.”
Just like recent retirees have to come up with a strategy to begin withdrawing funds they accumulated for their Golden Years in 401(k)s and IRAs, so do parents looking to maximize college savings.
“I always tell clients, it’s one thing to save for college,” says Marguerite Cheng, CEO of Blue Ocean Global Wealth based in Gaithersburg, Md. “Now, you have to learn how to pay for college.”
Some financial decisions, such as selling stocks in accounts that don’t shelter gains from the IRS, can cause you to pay more in taxes. Others can have a negative impact on your financial aid package or reduce your eligibility for government tax credits, such as the American Opportunity Tax Credit, which maxes out at $2,500.
One thing you should not do to fund your child’s higher education is raid your own 401(k) retirement account, says Andrew Tapparo, president and founder of Tapparo Capital Management in Topsfield, Mass. “You can always get a loan for college, but nobody is giving loans for retirement.”
Here’s a guide for deciding what types of savings you should tap first to pay that big tuition bill:
College payment option plan
If you have enough cash left over in your checkbook each month, see if the college has an interest-free monthly payment plan that allows you to spread part — or all — of your tuition payments over the full school year for a small fee, Tapparo says. Cash still yields close to
0%, so you won’t give up much in returns by pulling it out of your savings or checking account. If you can set aside
$500 or $1,000 a month, you can whittle your college bill down by $5,000 or
$10,000 each year.
529 college savings plan
Since 529 plans are filled with dollars specifically set aside for college — and the savings, gains and withdrawals have no tax consequences — this is the next bucket of money to pull from, personal finance pros say.
Most 529 plans are invested in socalled “age-based” funds, which means the portfolio gets more conservative and is heavier on cash and bonds — rather than riskier stocks — by the time your son or daughter enters college. That means the 529 won’t lose a lot of value even in the event of a stock market swoon.
Don’t drain your 529 savings in your child’s freshman year. Instead, divvy up the money equally over four years to increase your chances of earning more on your money while it remains invested and giving you more payment flexibility in the future, advises Maria Bruno, head of U.S. wealth planning research at mutual fund firm Vanguard. Parents can also keep a higher 529 balance as the funds have a more limited impact on annual aid eligibility.
Cash
College savings sitting in a bank account are worth tapping next. Why? The national average yield on a bank savings account is a minuscule 0.09%, according to Bankrate.com. “The money isn’t working for you anyway,” Tapparo says. Using your cash also means you don’t have to sell assets in other accounts, which gives them an opportunity to continue grow in value. Plus, there are no adverse tax consequences from using cash.
Stocks and funds in taxable accounts
Stocks or mutual funds in taxable accounts are the last assets you want to sell to raise cash for tuition. The reason: Any market gains will be subject to capital gains taxes, which will both boost your tax bill and potentially put you in a higher tax bracket. The tax hit also means less of your money can go toward paying your tuition bill.
“The key is to pay for college in the most tax-efficient manner as possible,” Vanguard’s Bruno says.
One more word of advice: Make sure you don’t have too much money for tuition riding on stocks. If the market tanks your account balance will shrink.
“You don’t want to tell your kid you lost money in the market and you can’t go to college until you are 20,” says Cheng, adding that parents should pare back their stock portfolio and move more money into cash as college nears.