As the new year is upon us, some of us may be thinking about goals previously laid out or creating new goals. Some may also be thinking about their savings strategy and are aware of its importance not only for items like unexpected expenses or for treating ourselves to a vacation, but also for significant expenses that are relatively easy to predict. College tuition is one of those common yet hefty expenses that drive people to build their savings, and the team at New England Investment and Retirement Group understands the importance and value of developing a college savings plan to help get a head start in tackling this cost.
Determining goals, costs and a game plan
Most parents have no idea what their young children will choose for a profession, yet it’s common for them to begin setting money aside during those early years. This is a good example of healthy savings practices, particularly because college costs have increased at a considerable rate- twice the rate of healthcare costs- and continue to rise each year. Eventually it will be necessary to sort out the details about what your college savings will be used for. As your children become young adults, it’s important to understand their goals and ambitions. What profession are they aiming for? How much will it cost to pursue this profession? Continual conversations can help guide students-to-be to understand not just the cost of different colleges that can vary widely, but also the associated costs of college beyond tuition including travel, books and supplies, and living expenses. Consistent discussion of these costs can help both parents and children determine a more precise savings plan.
Balancing saving and borrowing
It’s quite common for parents to utilize savings, borrowing, and often one or more forms of financial aid to balance a college payment plan. Choosing to save more money over time reduces the amount needed for financing, which is another valuable discussion topic for parents and their children. Creating a 529 plan, for example, can be greatly beneficial for families as these plans allow for tax-free saving (and withdrawals) and favorably large contribution limits of up to $400,000 or more per beneficiary. For those who have not established a savings plan, borrowing is typically imminent. Whether parents, children or both choose to borrow, it’s important to analyze the details including how much is truly needed to borrow as well as the full cost and timeline of repaying a college loan. If borrowing is necessary, it’s important to research the options available, which includes a number of federal and private loans. It’s a good idea to develop a working relationship with a trusted financial expert (or experts) who can help you make sure your family will get the most favorable interest rate that also meets your needs.
Saving early is better, but late is better than never
While saving for college is common, there are sometimes factors and unexpected situations that prevent consistent savings. It’s not uncommon for some families to misunderstand the costs of tuition and come up short. No matter the reason for a delayed or sparse savings plan, families should not be discouraged from establishing one. Even though college costs rise each year and are sometimes difficult to predict, any savings put away, especially in a 529 savings plan, can help ease the burden. Working to eliminate high-interest debt as soon as feasible can also help to provide more flexibility in building savings.
Tax bill changes to consider
The Tax Cut and Jobs Act included a new 1.4 percent excise tax “on a private educational institution’s endowments that amount to more than $500,000 per student,” according to a recent US News report. While this tax affects only colleges with huge endowments, some of the top schools in the country- including Harvard University, Dartmouth College and Yale University, just to name a few- will feel the pinch of a new tax that some worry may lead to adverse outcomes. Harvard President Drew Faust recently expressed belief that the new tax will “constrain the resources that enable us to provide the financial aid that makes college more affordable and accessible and to undertake the inquiries that yield discoveries, cures, innovation, and economic growth.” While this tax affects relatively few colleges, it’s good to keep in mind that some of them will be dealing with a significant increase in taxes.
Also keep in mind that interest deductions on home equity loans and home equity lines of credit are gone until after 2025; families looking to pull from their equity to pay for college should understand that this may now be a less desirable option with this deduction lapse.
Saving for college is not a one-size-fits-all endeavor, and families of varying circumstances have different needs. Regardless of the specific situation, it’s incredibly valuable to initiate a strategy that meets those needs and take action to refine that strategy. At New England Investment and Retirement Group, we recommend discussion with trusted financial professionals who can provide additional insight and guidance.