Envision the day you finish fellowship, when you make that phone call or go online to set up your student loan repayment plan. As financial advisors, two of the most common questions we field originate from this moment. The first question is, “What’s the best way to pay this back?” This is followed by, “Will I ever get through this and be able to do all the other things that are just as important?”
It’s with those thoughts in mind that we’d like you to consider what you can do to help your children lessen that burden. The cost of higher education is growing, but it’s important to note that it’s running at rates almost double that of historic inflation. When considering retirement, we all understand the importance in investing for our future by using a mix of assets and accounts where we expect the appreciation to not just match inflation, but really exceed those margins.
By starting early we have the confidence that we’ll have what we need when we get there, and we’ll be less concerned that money will run out!
So, if the cost for higher education is growing that quickly we think it’s important to consider what options are available to help meet those educational needs, while making sure the next generation also has a shot at preparing for their own retirement. One of the luxuries of your career as an family practitioner is that you will likely have the ability to prepare for both, and the best thing about educational savings plans is they often add in one or more tax incentives along the way.
There are a number of convenient methods for preparing for future educational expenses. The most common options offer tax-deferred accumulation and tax-free withdrawals for qualified higher education expenses. Depending on your state residence there may be an option for limited state tax deductions upon contribution, so as our clients evaluate means of offsetting taxable income, beyond providing a gift to your children the tax savings is pretty attractive as well! These accounts typically provide a broad selection of investment options for appropriate levels of diversification and flexibility within the accounts. Provided you approach these plans with consistency, similar to how you might invest for your retirement, the compounding interest upon interest and the tax-free distributions for qualified higher education expenses you’ll put yourself in a great position to help your children pay for their education.
Beyond the common approaches, there are also a variety of other approaches, which may be an appropriate fit for you and your children’s planning needs—from pre-paid tuition plans and state bond agreements to insurance-based plans. Each option differs slightly, so it’s important to compare and contrast each to fully understand the scope of the investment options, potential tax incentives, and other possible benefits or limitations.
Lastly, the need to cover all the expense isn’t always necessary. Sometimes there are other alternative means of paying for tuition—scholarships and endowments come readily to mind—and possibly you feel that your children will better value their education if they have to put in some effort to pay a portion of that cost. There is no right or wrong answer to the level of support you provide. It will ultimately come down to your goals and philosophy on the matter.
Michael Merrill and Evan White are financial advisors with the independent financial services firm, Finity Group, LLC.