How to Balance Your Budget During College Savings Month

Tax Planning Caucasian college students revising their notes before classes.

The article below is up to date based on the latest tax laws. It is accurate for your 2019 taxes (filed in 2020) and 2018 taxes, which should be filed by the April 15th, 2019 (or October 2019 with filed extension) deadline

Student loan debt is a huge burden for many families and students. It is estimated that in the class of 2018, 69% of college students took out student loans, and average about $29,800 of student loan debt.

As parents, we’d like to spare our kids from having too much debt when they graduate and begin their careers even if that means stashing away money in a college fund to help out. The reality though, between taking care of bills, knocking down debt, and investing for your retirement, is there isn’t that much money left over to save for the costs associated with pursuing higher education.

Here are a few key ways you can set aside money for college without taking too much away from your other financial goals.

Time Can Be an Ally

First off, if your kids are in grade school or younger, you have a huge advantage when it comes to college savings: time.

Opening up a Coverdell Education Savings Accounts (ESA) or a 529 plan can be a fantastic way to save for your kid’s college expenses down the line as well as receive some financial breaks (think taxes!). These accounts allow you to save and invest money through the years. The more time you have between when you start contributing and when you begin withdrawing the better.

Compound interest can help snowball your contributions to a more meaningful amount without requiring you to invest a ton of money. With both types of accounts, you can invest your money and it grows tax-free. If they are used for educational expenses (like tuition at a qualified institution), you can withdraw tax-free as well.

ESA accounts can be used to pay for K-12 expenses, however, you’re limited to a maximum contribution of $2,000 each year. The 529 plan actually has no contribution limit, though most parents cap annual contributions at $15,000 per year, so as not to incur the federal gift tax.

Benefits of the 529 Plan Under Tax Reform

Under the new tax reform law, there have been a few changes to the 529 plan. Under the previous tax law, the benefits of 529 plans were limited to a college education only, but now the new law expands their use and parents can now use the 529 plan to pay for their children’s education at private elementary and high schools.

This was a benefit previously provided only by Coverdell Education Savings Accounts (ESA). The 529 plan is now available to parents of younger children in private schools and expands the options that parents have to educate their children since they will see some tax benefit if they chose to send their kids to private school.

You should also check to see if your state offers a tax deduction for your contributions since opening them up is a fairly straightforward and easy process.

The Fine Art of Scholarship Hunting

What if your kid is older and you don’t have that many years before they are attending college – how can you ‘catch-up’ on savings? Well first off, you can help your child master the art of scholarship hunting.

When I interviewed College Admissions Coach and Scholarship Strategist, Pam Andrews, I found there are plenty of ways you can get the ball rolling: 

  • Know your options with schools. Pam’s son was interested in art, so they started examining highly rated art schools as well as in-state options with strong art programs. They also considered how generous a school was with their financial aid packages.
  • Review all of your connections. Don’t just focus on the big popular scholarship sites when hunting. See if your company, professional and/or recreational organizations, and industry offer scholarships.
  • It all adds up. While big dollars can be attractive when trying to decide where to apply for a scholarship, you can bet there will be plenty of competition. Mix up and spread out your applications so you can grow your scholarship funds through multiple programs.

She used these strategies plus more to help her son win over $700,000 in scholarships!

Finessing Your Budget for College Savings

Either way, you need money to contribute to your kid’s college fund. As you’re getting started, remember to do the following:

  • Know your numbers. The first step is to see if you have any money leaks in your budget – those ‘extra’ expenses that aren’t exactly in your budget. Tools like Mint make it a snap to grab what you need. You can also keep tabs on your spending so you’re more likely to stick with your budget as you watch yourself progress.
  • Focus on one expense at a time. I know we want to slash everything at once, but if you want to save up for college without impacting morale along the way, slow and steady will win the race. Do a money challenge – it’s a fun way to reduce your expenses which can then be redirected to the college fun.
  • Be a part of the gig economy. Honestly, sometimes you just need to earn more money if you want to hit all of your goals. And that doesn’t mean you have to tie yourself down with another job. Working a flexible schedule with gigs like Uber and Fiverr can make a big difference in your budget if you’re interested in making some extra cash.

Thoughts on College Savings

I’d love to get your take on saving for college. How are you juggling everything? What plans are you contributing to?

Don’t worry about knowing these tax rules. TurboTax asks you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can also review, sign, and file your tax return.

Comments (1) Leave your comment

  1. Let kids completely stand on their own; they will learn much more than any education could possibly give them. That is what exactly happened to me; and now I feel so much better when I have achieved a 100 times what they have. And now I have the potential to take care of them if needed, but they may not ask for any help.

Leave a Reply