Spring is generally the peak season for celebrating the many accomplished graduates in our lives. Whether transitioning from high school to college, or from undergraduate to graduate, we are more than willing to inspire and encourage them on the success of their journey so far. The untold story however, is that millions are now entering the unchartered territory of juggling massive student loan debt while trying to avoid not to ruin their personal credit. So if you happen to have children or dependents this naturally poses the question: how and when should you start preparing in order to avoid this problem? Fortunately there are some very practical steps you can take today to get ahead of the price tag of college tomorrow. And as with any planning effort, the earlier you can get started in applying these steps the more of an advantage you will have in the long run.
Start A College Savings Plan
Unlike ten or twenty years ago, college savings plans are an extremely viable tool for almost anyone who is interested in them. All saving strategies from prepaid savings plans to using Roth IRA’s have their own set of pros and cons based on your own financial circumstances. However, the option that easily tends to be most popular nowadays is the 529 Savings Plan. Also known as qualified tuition programs, 529’s are an extremely practical option due to the favorable tax treatment they receive from the IRS. In a nutshell the money you invest in this plan is allowed to grow tax-free and eventually distributed tax-free as long as it’s used for “qualified education expenses”. Some states such as Pennsylvania even offer an additional state income tax deduction for the funds that you personally contribute. Finally, with the recent changes in government tax reform, 529 plans can even be used to pay for K-12 education costs now (both public and private).
Encourage Your Family & Friends To Get Involved
Usually when birthdays and holidays roll around family members are more than willing to shell out toys, clothes, and other short-lived items. We often don’t consider just how many total dollars go toward these gifts, only to eventually end up discarded (or donated) as the recipient loses interest in them. One valuable alternative to this form of gift-giving is to offer family and friends the choice of contributing to a college savings plan instead. Fidelity.com for example, offers a “College Gifting” program which allows you to set up a personalized online-giving page for others to contribute electronically to a 529 plan. This not only gives family & friends the freedom to donate for special occasions but potentially donating all year round as well. These and other methods that leverage online social-media are a great strategy for funding a college savings plan.
Understand The Tax Implications of College Funds
Even if you plan to forgo your savings strategy for college scholarship opportunities, it’s still in your best interest to know the overall financial impact. As a general rule scholarships are tax-free for IRS purposes, but only when used for tuition & normal and necessary enrollment fees (i.e. books, supplies, equipment, etc). However, scholarship money that goes toward incidental fees such as room and board are technically considered a taxable income source. As a result you could end up with a tax liability for these amounts as well as any additional funds that exceed the total cost of tuition and fees. Therefore, one of the best things you can do to make sure you’re in good standing is to maintain detailed records and receipts when it comes to the use of scholarship funds. This will help ensure that something as simple as free money for college doesn’t end up becoming a tax headache for you down the road.
In following the steps outlined above it’s also extremely important to note they are a not a comprehensive roadmap to college funding. Instead they are simple and practical steps we can all take to make sure we’re on the right path to reaching our goals.