Like many parents, you may be concerned about how you will pay for your child’s college education. Whether you begin saving when they are young, or start to think about how to pay for college in their final year of high school, while trying to limit debt, there are a number of options available.
This can be a great way to start saving for college from the time your child is an infant. The advantage of a 529 plan is that the growth is tax-free as long as you use it for higher education expenses. If you choose this type of plan, you may want to find out whether the same will be true for state taxes. You may need to get a state-sponsored plan to take advantage of this. If your child gets a scholarship, you can withdraw an amount equal to the scholarship amount although you will have to pay taxes on it. However, if you do not use the rest of the account for education, you could be taxed and penalized when you withdraw it. You can change beneficiaries with a 529 plan.
Some people prefer using a Roth IRA to a 529 plan. The money in the Roth IRA is also allowed to grow tax-free, and if you are at least 59 1/2, you can take out money tax-free as long as you have had the account for a minimum of five years and you use the money for qualified educational expenses. A Roth IRA is more flexible than a 529 plan, but the withdrawals can affect financial aid eligibility.
Even if you have other savings, your child may need to take out student loans. The first step in determining how much financial aid might be available is to fill out the Free Application for Federal Student Aid. It is important to do this even if you don’t think your child will be eligible. Every year, grants and other money set aside for students goes unclaimed because they do not complete the form. Federal student loans have some advantages over private loans including more flexible repayment terms, but private student loans can be a good option for students who are looking to secure alternative financing compared to federal loans.
Grants and Scholarships
The advantage of grants and scholarships is that they do not have to be paid back. The FAFSA will help you identify the availability of government grants, which are mostly need-based. However, even if your child is not eligible for federal financial aid or government grants, there may also be scholarship opportunities. Researching is worthwhile since in some cases, like financial aid, some may go unclaimed. Some are very niche, with restrictive requirements, but your child may qualify for one of them. They can also vary widely in their application requirements. Some are relatively easy, but others may require essays. This means you will probably want to choose a mix of easy and harder ones to apply for so that your child is not overwhelmed with applications and essays.