I’m a first-generation college graduate. College planning wasn’t introduced to me until after I had taken loans for my undergraduate degree! I was unaware of the options and how important it is to make educated decisions in regard to paying for college. What do I wish I would have known?
There are four strategies for education planning: pay-as-you-go from work income, saving, financing, and grants/scholarships. These options can be used individually or in combination.
A parent, or a student, may use their current earned income to pay for some of the costs of attending college. Some students participate in “Co-op” opportunities, often through their college or university, such as working one semester in their field of study, then attending school the next semester.
There are a variety of savings vehicles for education expenses. There are pros and cons to each. It’s important to find one (or more) that works for your unique situation. Saving for college is the best option because you have the most control over the outcome. Start early and take advantage of compounding interest!
- Coverdell Education Savings Accounts (ESA). ESAs are similar to a Roth IRA. Investors make a non-deductible contribution and the funds grow tax-deferred. The withdrawals will be tax-free when spent on education expenses. This option might be a good fit for someone who expects to be in a high tax bracket in college. Beware! There are certain requirements that have to be met in order to make contributions to ESAs. For more information on ESAs click here.
- UTMA Accounts. A UTMA account is basically a savings account that a guardian has control of until the minor reaches adulthood (18 or 21 depending on the state). Some guardians want to save money for children or grandchildren without having the restrictions of having to use it for qualified education expenses. Warning! Once the child reaches the magic age of adulthood, they have complete and total control of the account and can use the funds on whatever they choose. For more information on UTMA accounts click here.
- 529 Plans. They are largely the most popular option for college savings. There are many benefits to using this savings vehicle. First of all, the owner of the account has control over distributions (not the child). Distributions are tax-free if used for qualifying education expenses. Lastly, the money can be invested and grow until the child is ready to use the funds. For more information on 529 savings accounts click here.
According to the institute for college access & success, 71% of all students graduating from four-year colleges had student loan debt (ticas.org). The reality is, many people must utilize some form of debt in order to pursue higher education. There are two types of student loan debt: federal and private. Private loans are available for those who do not qualify for federal. Qualification is determined by applying for the FAFSA which is a free application for federal student aid. My biggest advice for those who must finance some or all of their education is to ASK QUESTIONS. Understand the terms before you sign on the dotted line, i.e., it is vital to understand interest costs, terms of repayment, and possible deferment or debt relief options. Learn about student loan types and options here.
Grants & Scholarships
I saved the good news for last! There are opportunities for students to obtain free money for college based on eligibility. Many parents and students are not aware that most colleges have scholarship “packages” for students based on financial need and/or based on their test scores. Always ask potential colleges if they provide discounts or scholarships for a certain ACT and/or SAT scores. There are also state programs that provide financial assistance to students. In Tennessee, there is the HOPE Scholarship and Tennessee (TN) Promise Program. The TN Promise Program allows students to go to a two-year college for free! To see if you’re eligible for HOPE click here. For more information on the TN Promise Program click here.
I recently finished my Master’s degree. Having the knowledge about college planning options for my graduate degree made a huge difference. Now, I have a son of my own and have started college planning for him! “An investment in knowledge pays the best interest.” – Benjamin Franklin