Saving for retirement and college simultaneously is a balancing act that many families face. However, experts say these goals don’t have to be in competition with each other. To manage both priorities, consider the following tips.
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“Your greatest asset is time,” said Mark Kantrowitz, bestselling author and financial expert, who points out that every dollar you save is approximately a dollar less you’ll have to borrow, and every dollar you borrow will cost about two dollars by the time you repay the debt. “By saving money, you literally save money.”
Make saving for both college and retirement a given with automatic monthly transfers from your bank account to your different savings plans.
Maximize the employer match on contributions to your retirement plan. That’s free money, so take advantage of it. As a general rule, Kantrowitz recommends saving one-fifth of your income for the last fifth of your life.
As far as college is concerned, he says to use the one-third rule to split future college costs: one third from savings, one third from current income and one third from loans.
Don’t mix apples and oranges
Don’t use your retirement plan as a college savings fund. Distributions from retirement plans, even a tax-free return of contributions from a Roth IRA, count as income on financial aid application forms.
Save for college using a 529 college savings plan, which, according to savingforcollege.com, offers tax and financial aid advantages not available for other savings methods. Like a Roth IRA, with a 529 you invest after-tax dollars, earnings accumulate on a tax-deferred basis, and qualified distributions to pay for college costs are entirely tax free. But 529 plans can be treated more favorably by financial aid formulas.
Look at all funding sources
If scholarships, grants and federal loans in the student’s name fall short, consider private student loans or a private parent loan. For simple, personalized loan options, check out specialists in the industry, such as College Ave Student Loans. Using technology and expertise, they offer competitive rates, a wide range of repayment options and a customer-friendly experience from application through repayment.
Financial industry veteran Joe DePaulo, CEO and cofounder of College Ave Student Loans, says that keeping your child involved in college cost discussions is critical to avoid becoming the bank of Mom and Dad, and that parents can be very influential in setting up a student for long-term financial success.
“As a general rule of thumb, students shouldn’t borrow more than what he or she expects to earn their first year out of school,” he said.
A college education is invaluable, and with smart strategies, parents won’t have to compromise their financial future to fund it.
—Courtesy of StatePoint Media