Saving money for college

NEW HAVEN, Conn. (WTNH) – At the start of the college year, there are a lot of students who are making a lot of firsts in their lives, and that includes managing their own finances.

Michael Tedone from CT Wealth Management has tips for college students on how to avoid debt, as well as for families looking to save for their child’s future education.

Avoid credit cards!! Use debit cards.
Given the young age of the student and their inexperience with credit, a debit card will help the student stay out of “credit trouble”. Without a steady material income stream, credit can be a dangerous proposition, for anyone.

Check the bill from college – don’t pay for health insurance you don’t need.

Many colleges bill directly for health insurance and the student is required to opt out. Each college has different rules so you should check with your college, but if the parents have health insurance for the student provided by their employer, they most likely would not want to pay this additional expense which could be several thousand dollars a year. In some cases, the college provided health insurance may be a good option for the family depending on their individual circumstance.

Tips for saving for college:

Utilize College Savings Plans – 529 plans. In Connecticut CHET.
The advantage of a 529 plan is that if the funds are used for post-secondary education, no earnings are taxed. So if you start when the child is young to contribute to a 529 plan, it could be 18 years before the funds are withdrawn for use to pay the education costs. That could result in a material amount of earnings (interest, dividends and capital gains) never being taxed. In my experience, this has been one of the best college planning tools people have used over the years. Connecticut residents receive a tax deduction on their CT return for contributions to a CT 529 plan (CHET) subject to certain limitations.

Consider having grandparents set up 529 plans in their names.
Where grandparents have wealth, we have seen the grandparents contribute to 529 plans for children. There is also the ability for the grandparents, and anyone for that matter, to contribute up to 5 years’ worth of 529 plans without adverse estate or gift tax consequences. That would be $70,000 for a single grandparent and $140,000 for married grandparents, per grandchild. Again this is a home run for wealthy grandparents (and fortunate grandchildren). Additionally, not related to a 529 plan, anyone can pay the education expenses for anyone else without adverse estate or gift tax consequences, by paying the education expenses directly to the education institution. Again, this is a powerful tool for wealthy families to fund education and plan for estate taxes.

Did they earn money this year? Consider setting up a Roth IRA
If a student has earned income from working, they can establish a ROTH IRA. A young person is a perfect candidate for this. They generally do not pay any income taxes so they are not losing a deduction as you would have with a traditional IRA and when they withdraw the ROTH IRA funds, there is no tax on any of the withdrawals. This is a home run for a young person, if they can afford to do this. If they do withdraw the funds prior to age 59 ½, there is income tax and a 10% penalty, in most cases. They should consult their individual tax person.

Have they researched all possible scholarships? Many local religious and civic organizations – even if you have no affiliation.
There are many different types of awards and scholarships once the student gets to school. The student should inquire to the department of their specific major to see if there are scholarships that are related to their area of study. Prior to attending school, the student should investigate all available scholarships by searching on the internet.

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