One of the tough challenges that a growing family faces is this: “How can we save for our children’s college expenses when we haven’t paid off our own student debt?” One possible answer is to establish a 529 college savings plan for your children.
Here is a brief overview of how most 529 plans work:
1. A 529 plan is created in your child’s name.
2. Contributions are made to the plan. These contributions are tax deductible in many states if the plan you are contributing to is in the state where you pay taxes. Check here to see if your state provides tax benefits.
3. The money you contribute is placed in a professionally managed fund, and compound interest will help it multiply over time.
4. Money in the 529 plan can be used for tuition, books, supplies, equipment, room and board, and any other college expenses included in the college’s cost of attendance.
5. If you take money out of the 529 plan for expenses other than college expenses, you are liable for income tax and a 10% penalty on the amount withdrawn.
6. You do not need to pay taxes on the money taken from the 529 plan that is used for legitimate educational expenses.
7. You can transfer money from an unused 529 plan to another family member.
How can you do a 529 plan if you are also struggling to pay off your own student loans?
Here are some suggestions:
1. Ask parents, grandparents, family members, and friends to make contributions to a 529 plan rather than expensive gifts for birthdays and Christmas.
2. See if your employer has a program where you can contribute to a 529 as a payroll deduction.
3. If there is not a payroll deduction for a 529 plan, do a contribution to your employer’s credit union and then use this credit union to enforce discipline to set aside money for a 529 plan. Make regular withdrawals from your credit union account to be transferred to the 529 plan.
4. Set up a gift/529 ratio for birthdays and Christmas. For example, a 2:1 ratio would mean that you would contribute $1 to a 529 plan for every $2 you spend on gifts for your children.
6. When it’s time for your child to attend college, make sure he or she takes full advantage of the available scholarships.
The strategies outlined above can help you offset the burdensome cash outlay you’ll need to make two times a year for at least four years. Very few people will have the cash for tuition without some type of enforced savings.
This article was written in partnership with University Survival.