Paying for your child’s college education is one of the largest single expenses your family may face. Given the magnitude of today’s college costs, it’s important that the investment you make in your child’s future is spent wisely and adequately appreciated.
Involving your child in their own college funding highlights the cost of education, teaches the value of money, and illustrates the importance of saving.
Following are a variety of tips on how to involve your kids in their educational funding, and what account types might be best for you:
Deciding if Your Kids Should Help Save for College
We encourage kids to participate in saving as a critical financial education technique. Having your kids contribute to their own college costs teaches the importance of saving early. It can also foster a greater appreciation for education, incentivizing academic achievement.
If you elect to have your kids contribute to their own college savings, we advise setting up a separate account. This allows your kids to clearly see and track their efforts and achievements, potentially inspiring them to save more. It also makes it easier if you decide to match their savings efforts. Doing so can help them understand the value of capturing future employer retirement match contributions once they graduate and start working.
Parental College Funding & Sharing What You’ve Saved
While we encourage kids’ financial participation, we respect and appreciate that some parents firmly believe that college savings is their responsibility. Whether you choose to co-save with your children or not, there’s merit to exposing them to the costs involved and the savings needed to make their college education a reality. This can be achieved by sharing what you’ve accumulated, relative to anticipated tuition and other college costs.
The one caveat to sharing how much you’ve accumulated is that doing so could infringe upon your children’s incentive to co-save alongside you. Some parents elect not to disclose their total college savings as a way to continue motivating their kids’ academic and savings achievements.
College Savings Accounts
A Section 529 Plan is a tax-advantaged savings plan, offering tax incentives for individuals who make contributions to their children’s, grandchildren’s, or other relative’s college education. These plans allow you to invest money for college or graduate school on a tax-deferred basis. If the funds are used for higher educational expenses, distributions are tax-free. If your child receives a scholarship or grant, your contributions don’t go to waste, and can be withdrawn penalty-free. You can also redirect the funds to cover other close relatives’ educational costs, including siblings, nieces and nephews.
We generally recommend establishing a Section 529 Plan sponsored by the state in which you reside as most states allow a tax deduction for all or part of a contribution to a Section 529 Plan. There is no requirement that monies be used at an in-state school. Visit SavingForCollege.com to learn more about the plans available in your state.
In addition to the tax benefits, you can also exercise more control over the funds than if you make an outright gift, or gift to minors through a Trust.