The All-Ages, All-Stages Guide to Saving for College

First Republic Investment Management
May 31, 2017

As a parent, you want your children to have a wonderful life and a future full of possibilities.

However, parents also must navigate the competing needs of family finances while establishing a college-savings plan capable of covering today’s rising college costs. Beyond saving, they may also wish to instill a sense of money savviness and financial independence in their children.

The good news is that with a little research, planning and a willingness to engage, parents can provide educational opportunities for their children while helping their family personally and financially flourish. In addition, parents can model smart money behavior and create teachable money moments along the way. Here are a few things to think about as you begin that process:

The planning process: Start early, save regularly
There are three main ways to save for your child’s college education:

  • Custodial accounts: Simple to set up and manage, custodial accounts can be a great vehicle for parents to build up and shepherd a college savings fund until the beneficiary — the child — reaches the age of majority. Contributions are considered gifts, so an individual can contribute up to $14,000 per year to the account without filing a gift tax form with the IRS. Custodial accounts are flexible: You can use funds for any expense that benefits your children. Be aware, however, that these funds count as assets on college financial aid applications.
  • 529 plans: Much like custodial accounts, you can “gift” up to $14,000 per year into a 529. These education savings plans are operated by state or educational institutions and include additional tax advantages in which donors can contribute up to five years of tax-exempt forward-gifting in just one year and funds grow free from federal dividend and capital gains taxes. As long as assets are used for qualified school expenses, such as college tuition and room and board, some states even permit tax-deductible contributions. Another plus? A 529 is not considered part of your child’s assets when applying for financial aid.
  • Traditional investment account: If you have the discipline to adhere to a no-touch rule and won’t be tempted to tap the funds if other expenses arise, a traditional investment account earmarked for educational expenses can provide considerable flexibility and control, though no significant tax benefit.

On the road to saving for college, don’t forget to budget for additional educational expenses. It’s important to recognize that certain tax-saving methods — such as flexible-spending accounts — can also help lower the costs of pre-college education expenses you’ll consider spending on your children from daycare and summer camp to preschool and private school.

During your child's college years: Look at ways to lower costs
To lower the overall burden of financing a college education, consider alternatives to costs outside of tuition.

For example, one year in off-campus housing can cost $10,000 or more in many of the nation’s priciest rental markets surrounding universities. It may make more financial sense to buy an off-campus home for your college-age child to live in. As with any traditional investment property, there are the financial variables to consider, such as the potential for market appreciation and the cost of managing a rental property. Some people may hold on to the property long after their child graduates and may collect rental income indefinitely or until it’s an attractive time to sell. If you want to expand beyond a single apartment, a multi-unit building could potentially be a source of income while providing your child a bird’s eye view of the day-to-day process of managing a rental property.

Further, it’s also worth exploring tax breaks you may be eligible for while your child is a dependent in the eyes of the IRS, including the child tax credit, the dependent exemption for each child, and a variety of special tax breaks for college. Each of these tax benefits has its own rules and income-based phase-outs. Learn more about these options and which one may make the most financial sense.

After graduation: Teaching financial freedom
Remember, college is designed to prepare your child for a vocation, not teach the basics of managing money wisely once they enter the “real” world. Be mindful of this. Understand the importance of starting the conversation about a rainy day fund, compound interest and the advantage of starting to save money while young. You don’t need to have a perfect personal finance history to do this; relating the money lessons you’ve learned along your own life path can be a powerful tool for helping your children build on your successes and learn from your mistakes, so make those connections.

Before your children walk across the stage to receive their diplomas, teach them about the importance of developing a cash cushion post-graduation. If your child is graduating with a master's degree, help them develop a four-step plan to build their own wealth, starting with their credit score. Share your advice in a way that makes sense to your fledgling adults so they leave the nest and prosper in their adult lives.

Preparing for college, from pre-school to post-graduation, provides you the opportunity to help finance one of the most important growth stages of your child's life — with less stress and a greater probability of setting your child up for future success. With these tips, you can work together with your child to find the approach that works best for your family.

The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you as-is, does not constitute legal advice and is governed by our Terms and Conditions of Use. We are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.

© 2017 First Republic Investment Management