Start Saving for College Now, or Pay Much More Later by Christopher Thompson, AllianceBernstein
May 20, 2014
The price tag for attending college 18 years from now is projected to be considerably higher than it is today—up to hundreds of thousands of dollars higher for a four-year degree. But using a tax-favored strategy to save for college can help make the costs of future educational expenses less daunting.
According to Sallie Mae’s annual report, How America Saves for College, roughly half of all US families surveyed with children under 18 are saving for college today. Many families use two vehicles to pay higher-education expenses: general savings accounts are the most common, followed by checking accounts. Those who aren’t saving via tax-advantaged methods, however, may be leaving quite a bit of money on the table—and of course missing out on valuable tax breaks.
It Pays to Plan
One-third of US families use a tax-favored approach to save for higher-education needs, which allows federal (and often state) tax-free withdrawals. When the time comes to pay for college, tax-advantaged savings can cover a multitude of expenses above and beyond tuition, such as room and board, books, supplies and other related costs, without resulting in tax penalties upon withdrawal.
Although less than half of US families surveyed use vehicles with tax benefits to pay for college, the ones that did were more successful savers than those that didn’t. “Planners” had over 80% more in college savings ($18,518) than “non-planners” ($10,105) (Display). This means that having a savings strategy in place now can help the money allocated for college stretch further when it matters most. Saving now can also mean sidestepping student-loan debt later.
The Time to Plan Is Now
Many parents hope to be able to afford a quality college education for their children. This dream can seem out of reach for many, but it’s never too late to start saving for future college expenses—especially if it means avoiding debt down the line. With a little planning, families can maximize their higher-education savings opportunities while taking advantage of tax incentives, making sending their children to college a more affordable goal.
The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.
Christopher Thompson is Senior Managing Director and Head of the US Retail Client Group at AllianceBernstein Holding LP (NYSE:AB).