Getting Creative with College Funding

Cameron Hamilton

In our previous discussions about college planning, we’ve discussed where and how much to save while acknowledging that these questions require several assumptions.  Is it sensible to make saving for college a major financial goal when there’s no guarantee the child will attend?  That’s a tough question for families and for this reason, we favor educating over dictating.  When it comes to college funding, we want you to know what it might take and how you might do it; we don’t want to judge your values & decisions.  The reality is most families don’t have college fully funded before the student matriculates.  If you or an heir fall into this majority, here are some creative strategies that can be used at any time to boost college savings.

Contribution Matching

We’ve met many parents and grandparents who are more than able to fund an education but want to see commitment before pledging their own dollars.  In this case, incentive can be a helpful tool.  One we have seen successfully used is contribution matching.  For example, a grandparent can offer to match college savings by the parent 2-to-1.  The benefits can be greater than the savings and their growth before college.  Such an incentive can be helpful in creating savings behavior that will benefit the parents’ own financial lives.  Once they are accustomed to budgeting for college savings, they’ve created cash flow that can later be used to help with tuition payments while the student is in school or bolster their own retirement goals.  The same strategy can be used by the parent or other relatives to motivate the student to save.

Child Roth IRA

A first job for a teenager has a host of benefits.  They learn new skills, become responsible for their own money, and improve their resume for future college and job applications.  This can be a great time to introduce higher-level financial concepts (hello, taxes!).  One opportunity is to introduce the child to Roth savings; they can contribute the lesser of their earned income or the $6,000 limit in 2019.  This can be paired with the incentive strategy if the parents or grandparents have the means, meaning the child can enjoy the fruits of their labor and also enjoy the long-term benefits of Roth savings.  At the same time, these Roth savings become an extra sleeve of potential college funding.  The basis (contribution) can be withdrawn tax free and without penalty at any age.  Additionally, the growth of the funds would avoid the 10% early withdrawal penalty (pre-59 ½ ) if used for educational expenses (note, income tax would still be owed on the growth if withdrawn within five years or before 59 ½).

Contribute In Lieu of Gifts

We don’t ever want to be guilty of bringing about a social faux pas.  However, I want to highlight a phenomenon that is becoming more socially acceptable due to ballooning college costs.  Grandparents and other relatives are contributing to college funds instead of giving traditional gifts like toys.  This fits the trend of giving experiences such as vacations & event tickets rather than more “stuff” like toys and games.  Indeed, there is growing research by leading behavioral psychologists that having more “stuff” doesn’t make us happier.  Especially for young children who may not remember gifts and who can benefit most from appreciation on savings, giving to a college savings account at birthdays and holidays can work well.