BLOOMINGTON — Start saving for your children’s education early — even before they are born. But don’t neglect your own retirement planning. And don’t let the cost of a college education scare you into inaction.
That is the advice of financial planners and others on the front line of battle to save and pay for college.
“Start early. That’s without question the biggest factor,” said Carol Burroughs, a certified financial planner with Forward Financial Planning in Normal. “Let time do the heavy lifting for you … Albert Einstein called compound interest the ‘eighth wonder of the world.’”
Rather than a standard savings account with minimal interest and no particular tax advantages, a 529 college savings plan — named after a section in the Internal Revenue Code — is recommended by Burroughs and David Stokes of Edward Jones in Bloomington.
With a 529 account, the growth of the investment is not subject to taxation as long as the money is used for qualified education expenses, such as tuition, fees, books and room and board. In addition, Illinois residents who participate in the state’s Bright Start or Bright Directions 529 college savings plan do not have to pay state taxes on money put into the account.
With the state’s individual tax rate at 5 percent, that’s a savings of $500 if you invest $10,000 in the account, Stokes said.
Bright Start and Bright Directions are operated by the Illinois treasurer’s office and shouldn’t be confused with another provision under Section 529, prepaid tuition plans.
College Illinois, the prepaid tuition plan operated by the Illinois Student Assistance Commission, has run into some financial difficulties and is not accepting new participants at this time.
“We don’t favor the prepaid tuition plans,” Burroughs said. “The problem is once you do that, you’ve lost control of the money.”
With college savings plans, the person who creates the account retains control, makes decisions on how money is invested and even can change beneficiaries.
Bridget Byron, director of college savings programs in the state treasurer’s office, compared the 529 college savings plans to 401(k) retirement plans.
“You decide what investments you want to make. That money is your money. You get monthly statements,” she said.
Parents must use an investment adviser to sign up for Bright Directions.
Meanwhile, grandparents also can open 529 college savings plans, which Burroughs and Stokes considered a good choice.
There are age-based options that change the make-up of investments to less risky choices as your child nears high school graduation, just as age-based 401(k) strategies use less risky investments as a person nears retirement, Byron said.
Still, they carry risks. They are not insured like regular savings accounts. On the other hand, a 529 savings account is a protected asset that can’t be touched in a bankruptcy or legal judgment, Stokes explained.
Both Stokes and Burroughs emphasized the need to save for retirement.
Children have several options to pay for their education, but “no one is going to give you a loan for your retirement,” Burroughs said.
With more people having
children later in life and with those children often taking more than four years to finish their college education, the time between when college bills come due and parents retire is narrowing, Stokes said.
“You might have to extend your working years,” Stokes said, and you need to discuss with your children how much you can — or can’t — help them pay for the college of their choice.
College cost calculators are available on several websites, including
Jana Albrecht, director of financial aid at Illinois State University, has advice for parents who didn’t start saving early or couldn’t save enough: Don’t give up.
“The first thing we generally tell families and students is that there are scholarships out there, but it’s work” to find them, she said.
Freshman year of high school is a good time to start looking at where your child wants to go, what the costs are and what scholarships might be available, Albrecht said.
She recommended looking at what scholarship applications ask about. For example, if they are interested in examples of the child’s leadership and community service, don’t wait until senior year to get involved, she said.
In addition, Albrecht said, “We always tell families not to be scared by the initial price.” Many schools, including ISU, offer payment plans for tuition and fees so the entire amount doesn’t have to be paid at the beginning of the semester.
Local experts offer the following tips on saving for college:
- Start saving as early as you can.
- Consider having a grandparent establish a college savings account
- Save for retirement first.
- Let people know you have setup college savings account; it might encourage them to direct birthday or other gifts there.
- Contact the financial aid office of schools in which your child is interested while they are still in college to learn about costs, availability of scholarships and work-study programs.
- Fiill out the Free Application for Federal Student Aid at fafsa.ed.gov
Sources: Carol Burroughs, Forward Financial Planning, Normal; David Stokes, Edward Jones, Bloomington;
Bridget Byron, director of college savings plans, state treasurer’s office; and Jana Albrecht, director of financial aid, Illinois State University.