College Funding Options for Investors Starting Late

The school year has started across the country, which means millions of parents in recent weeks have turned their attention to how they will pay for college. As costs continue to escalate, however, many are worried they’ll never be able to save enough.

Last year, the average cost of tuition, room and board at a four-year public institution was more than $36,000, a more than $1,000 increase from 2016-2017. For private schools, the bill is much more expensive, with the price tag nearing $47,000. Add that up over the course of four years — or more — and it’s no wonder that parents are on edge.

Without question, the soundest advice when it comes to investing savings for higher education is to start early, but there are countless Americans that, for whatever reason, haven’t been able to do that. If that’s you, not all hope is lost because there are ways to catch up or compensate.

[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]

Consider the following:

529 plans. The most popular college-funding vehicle is the 529 plan, which are typically structured like a retirement savings plan, except the money can be used much sooner and is specifically intended to pay for qualified education expenses. Pre-paid plans allow you to lock in tuition credits at current rates at participating schools.

Earnings grow tax-free and withdrawals are not subject to federal income taxes, while most states allow you to deduct plan contributions. Unlike 401(k)s and individual retirement accounts, contributions to 529 plans are not tax deductible at the federal level.

While many people believe it’s too late to invest in a 529 plan once a student is in high school, such plans are an ideal vehicle for families that are behind.

For one, it’s never too late to start saving. Two, there are no contribution limits, allowing families entering their peak earning years just as their children become teenagers — which is very common — a way to make large lump-sum contributions that can generate returns. Three, you can continue to make the contributions until the student graduates, meaning the benefits will endure longer than most realize.

Pick the best fit. When young people begin to think of which college is the best fit for them, they often consider a variety of factors, including where their friends are going, which school is farthest from home or even which one has the best football team. However, from a planning perspective, determining “fit” means something else, often requiring a thoughtful discussion between parents and children.

[Read: How to Find a Great 529 Plan to Pay for College.]

These conversations should explore a few key points.

At the top of the list is where the student will thrive both academically and socially, giving them the best chance to develop into a well-rounded adult. Then, the family must ask what school meets the goals of the student for post-college plans, based not only their field of study but the professional network they can build through the school. Finally, the conversation should turn to affordability. This includes overall costs, where the student has the best chance to graduate on time, and availability of grants and scholarships.

Business owner parents. Families that own businesses can hire their children and pay them a wage that falls below their own standard deduction. This could help business owners mitigate their tax burden — and introduce children to a potential future career that allows the family to build multi-generational wealth — but the main benefit is for the student’s college funding.

Since those wages are not taxable, students can save everything they make and put it in a college account of their own. Late starters may find this especially helpful. Over the course of three to four summers, those savings alone could approach $20,000.

Involve the children. Far too often, young people don’t appreciate how much college costs, mostly because their parents don’t talk about it with them. As a result, students may not think twice about their parents unloading investment accounts or taking out equity in their homes to pay for college.

These are typically terrible ideas because they can weaken the parents financially by compromising their retirement goals or estate plans. Were children to know how such decisions could affect their parents, they likely would be more willing to make sacrifices themselves.

[Read: Take a Crash Course in Student Housing Investments.]

For example, students could attend two-year colleges before transferring to a four-year school, take a part-time job or work more hours, as well as stay in-state for school. Not only would these steps save the family money, but they could also instill some discipline in the student by showing them the value of resisting excessive indulgences.

Start now. Paying for college is daunting. Even for families who earn comfortable six-figure salaries, it will be a challenge, especially if there is more than one child. For others, it may seem like an impossible climb. But there are ways to cope, even if you’re not already off to a flying start.

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