Tapping into Savings to Pay for College

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Published December 07, 2012

| FOXBusiness

Families putting together their financial plan to pay for college may be forced to rely on their own bank accounts to cover tuition costs.

According to a survey commissioned by Discover Student Loans, when asked to choose from a list of options, 36% of parents said most of the money to pay for their children’s educations will come from savings accounts, 24% from family savings and 12% from 529 savings plans.

The survey shows that in addition to savings, parents rely on student loans (28%), income from a second job (5%), retirement funds (4%), and a second mortgage or refinance (3%) to pay for college.

As the cost of a college diploma continues to increase, it is critical for parents to start putting money away for college as early as possible and to create a financial plan and regularly assess and re-evaluate their progress year upon year, says Ameriprise advisor Betsy Billard.

“Most families don’t understand the yearly amount needed to save from the time their child is born to the time the child actually begins applying for colleges,” she says.

Parents need to have a mutual understanding of how much they’re going to support their children in college, adds Jeff Rose, certified financial planner and author of Good Financial Cents

“One parent may be more inclined to only help out what they can with their children, while the other parent may want to pay over and above tuition plus room and board, etc., so the important thing is to make sure that both parents are on board with the same plan,” he says.

To ensure parents stay on the same page and within their budgets, here’s what the experts say to consider when using savings to pay for college.

How to Save for Multiple College Funds

Parents need to realize the exponential cost of putting more than one child through college for several years and what that means for their savings.

“When divvying out the funds, it's important that you either give equally or have an explanation as to why one sibling will get more help than another,” says Reyna Gobel, author of How Smart Students Pay for School

Experts maintain that early planning is crucial for sending several kids though school, especially with college costs inflating at a rate of 8% a year, says Billard.

“Without a defined financial plan it is almost impossible to keep track of the inflation and costs, particularly when dealing with multiple children.”

Paying With a 529 Plan

Using a 529 plan (an education savings plan operated by either a state or higher education institution designed to help families save for college) allows earnings to grow tax deferred and the owner (usually the parent) retains control of the account rather than the beneficiary.

“Each year you can contribute up to $13,000 per person for each beneficiary without having to pay federal gift tax and withdrawals for qualified education expenses are not taxed federally,” says Billard.

Parents should talk with a financial advisor or a representative from their state's 529 plan, says Gobel.

“Depending on associated fees, savings accounts may have rates even taking into account fees that would make opening a 529 plan worth it without choosing any other investments,” she says. “Also, some states offer perks such as matching grants on 529 contributions.” 

Research Before Taking Out an Equity Loan

Although lending standards are more strict since the 2008 financial crisis, parents should tread carefully when borrowing against their home to pay for college, advises PK Parekh, vice president of Student Loans at Discover

“You have to think about what’s the cost of student loans versus equity loans if they’re available to you --do you want to be in a situation where you’re leveraging your assets?” he says.

However, with interest rates at all time lows, parents can take advantage of refinancing to save additional money each month that can be put into a college savings fund, says Rose.

“If the parents were able to refinance and free up an extra $200 a month, that could go a long way--not only paying for school but also saving for their own retirement.”

Retirement Should Trump College

One of the biggest mistakes parents can make is putting more emphasis on their child’s education than their own retirement, says Rose. 

“While you’ve prevented your child from taking out student loan debt, now you may be working much longer than initially planned, plus your child may have to support you because you didn’t take care of yourself,” he says.

Although college and retirement are both major life events, it’s important for families to balance both objectives, says Parekh.

“You want to help your kid get a great education and you want to have the best for them [but] at the same time, you have to be planning ahead of time for retirement…and you don’t want to sacrifice that,” he says. “You can borrow money for your kid’s education but it’s not like you are going to be able to borrow money for retirement.”

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