College Savings Options: Find Your Strategy

By Chris Compton

College is expensive. According to educationdata.org, the average cost of college in the United States is $35,720 per student, per year, including tuition and additional expenses. While the price tag for private versus state university is clearly different, both cost a lot of money. Not only that, the cost of attending college continues to rise.

College is not for everyone, and not everyone is going to go. For those who are, how will they pay for it? Many parents and students go into debt to make college a reality. Student loan debt has skyrocketed to more than $1.7 trillion for Americans over the past decade. Graduating from college with a massive student loan debt load is a difficult and discouraging way to start a career and move forward with other financial goals.

You are probably thinking there must be another option. Good news! You can get a head start for yourself or for you children (and grandchildren) by saving for college through a financial option that offers tax breaks. These tax breaks can help your money stretch. Many products in the marketplace help families save for college, and each has its own advantages and disadvantages.

Two of the most popular that offer significant tax breaks include the 529 plan and a Roth IRA.
A 529 plan is a dedicated college savings plan run by an individual state. Some are prepaid tuition plans, but most are savings plans. Here is how they work: you place after-tax dollars into a 529 plan, the money is invested, and you withdraw it tax-free (when used for educational purposes).

A 529 plan has many advantages. You are not restricted to your state’s plan. You can choose from any state plan. These plans have high contribution rates, and for most of them, have no income limits. When a 529 plan is set up, a beneficiary must be named. If this beneficiary does not go to college, you can switch beneficiaries. The money invested in a 529 plan grows tax free and is tax free upon withdrawal, as long as it is used for educational purposes.

The only major disadvantage to a 529 plan? If the money is not used for educational purposes, the growth is subject to taxes and a 10% penalty.

While a Roth IRA is a retirement account, it also can be used as a college savings option, which offers great benefits and flexibility. Roth IRAs are similar to 529 plans in that you make after-tax contributions, and they grow tax free. Withdrawals are tax free once you reach age 59 ½ and have had the account for at least five years. Earnings are usually taxed and penalized if withdrawn prior to that age, but some special rules allow you to avoid these penalties if the money is used for college expenses. You can withdraw contributions any time without taxes or penalty if the money is used for college expenses for yourself, your spouse, your children, or your grandchildren.

Saving for college may require a combination of strategies. You may want to utilize both a 529 plan and a Roth IRA. Or you may choose to use another option altogether. The important thing is to start early and do the research to determine which option is right for you and your family.

Saving wisely can give you more options and help you get ahead of ballooning college expenses.
Remember, you don’t have to save for college alone! Grandparents, aunts, and uncles are often happy to contribute, and you can even let your kids pitch in. Their education will mean more to them if they help pay for it.

About the Writer: Chris Compton is communications officer for Free Will Baptist Board of Retirement. He graduated in 2007 with a M.A. in Bible exposition from Columbia International University. A 1998 graduate of East Tennessee State University, he has over 13 years of administrative/financial experience in varied fields as well as seven years of pastoral ministry experience.