College savings and coronavirus: 5 strategies to consider in tough times
With the coronavirus pandemic hitting the economy hard, many families may feel forced to cut back their savings rate to get by. If you’ve been furloughed or your business is struggling, it’s hard to save for future plans when current needs are so pressing. But if you’re serious about saving for college for a loved one, you may not be able to wait years for the economy to turn up again.
Average in-state tuition at a four-year public university costs $10,440 for the 2019-2020 school year, while room and board adds on another $11,510, according to the College Board. It’s a lot of money to save with no more than 18 years before a child starts college, especially as costs gallop higher.
But while socking away money forms the basis of a solid plan for affording college, it’s not the only thing you can do. You’ll want to make use of tax-advantaged plans such as a Roth IRA or 529 college savings plan that allow you to invest in potentially high-return investments as well as make maximum benefit of lower interest rates.
These are a few strategies to consider when facing tough times, if you’re trying to save for college.
1. Reassess your spending
When economic recession hits, one of the places consumers tend to cut back first is saving. Few people find saving to be fun, but it’s absolutely essential, whether your goal is a comfortable retirement or affordable college. One of the surest ways to improve your financial future is to put away money regularly.
“I think it’s a good time to examine our spending more generally,” says Dan Ariely, chief behavioral economist at Qapital. Ariely notes that the coronavirus is increasing stress, alcohol consumption, and the tendency to spend too much on restaurant delivery. “We didn’t design our living environment to be in such close proximity to family for so long.”
Ariely notes that consumers may spend money out of boredom, rather than need or a real want. “If stress is high, it’s hard to read a book but relatively easy to look at shopping websites,” he says. “In a period without much control, it is easy to use shopping as a way to feel in control.”
So Ariely advises consumers to closely monitor their spending to find ways where they can cut back, especially on those areas that might not be physically or mentally healthy.
“Look at your credit card statements for the past six months and find the things that did not give you joy,” says Ariely, and then cut those.
Finding the extra money to put into a college fund starts with this kind of reassessment.
2. Start with a 529 savings plan
If you’re going to save for college, you should at least investigate the 529 college savings plan to determine if it might meet your needs. The 529 allows parents and other relatives to invest after-tax money in a tax-advantaged account that can be invested in potentially higher-return assets such as stock funds. Alternatively, you may set up a prepaid tuition program. In addition, states may offer additional tax breaks for participating in a 529, so savers have a bit of extra incentive.
“Start early, even if you start small,” says Ksenia Yudina, CEO of UNest, which makes a mobile app that manages your college savings. “Solutions like UNest’s college savings app allow you to contribute as little as $25 a month.”
Often savers are daunted by the scope of their need, but it’s important to start today and then continue the discipline of saving, even if it’s only small amounts during hard times.
And remember that if you start early, you’ll have time and the compounding power of the stock market on your side.
“College savings accounts have a 10 to 15 year horizon,” she says. “Do not sell out of your existing college savings account if you see market volatility. The markets will rebound and your investment will grow as long as you keep holding and adding to your account and have a long-term focus.”
3. Roll that stimulus check into savings
The CARES Act is returning up to $1,200 to individual taxpayers in the form of a stimulus payment, but don’t think of this as found money. It’s really the government giving you a credit against this year’s taxes, not some windfall. For savers who don’t need the money today, it’s an ideal time to stash this cash for college.
“Look online to research high-yield savings accounts and consider putting a portion of the stimulus check into it if you meet the eligibility requirements,” says Leslie Tayne, attorney at Tayne Law Group in Melville, N.Y.
“If you or your child are heading to college soon, an online savings account can be a better idea than a 529 plan for the time being since the market is so volatile,” she says.
Even if you can’t spare much now, put in a little bit so that you maintain saving discipline.
“Consider depositing a small amount regularly into the account, even $5 a week adds up to $260 over a year plus interest,” says Tayne.
One option for saving is a custodial account, which allows an adult to transfer money to a child under 18 and is exempt for a portion of the investment gains. The funds must be used to the benefit of the child, but otherwise there are few restrictions. The downside is that parents have less control over how the money is spent once the child reaches the age of 18. These accounts also hurt your child’s ability to secure financial aid more than money in a parent’s account or a 529 plan, but the money can be rolled into a 529 plan later to avoid this penalty.
4. Refinance your debts
It’s tough to think about this economic slowdown as a potential opportunity, but many people can use this time to get in control of their debts. Interest rates have plummeted in the last few months, and that’s good news for those who can refinance into lower-rate debt.
“The opportunity in this chaos,” says Beth Walker, a wealth adviser at Carson Wealth, “is to evaluate all the areas where parents can free up cash flow through debt optimization.”
For many people the place to begin is the largest debt – your mortgage. Homeowners have been rushing down to the bank to get lower rates, overwhelming bank staff by the sheer volume. Refinancing your mortgage could save you tens of thousands of dollars over the life of the loan, and that’s money that could go into a 529 savings plan or another dedicated savings account.
And when you refinance, you may be able to win two ways: lower rates and a longer term. Lower rates reduce how much interest your loans accrues, but extending the length of your mortgage also reduces your monthly payment, freeing up more money, too.
Once you’re done with your biggest obligation, see where else you can free up cash flow.
“Refinancing current liabilities – mortgage, car loans, credit cards, student loans held in the parents’ names – makes so much sense,” says Walker. “The current environment offers opportunities to lock in lower rates across the board, increase cash flow efficiencies, take lower-cost student loans, and prepare your cash flow for your college game plan.”
5. Use your Roth IRA
If you need to save for college, one unorthodox place is inside a Roth IRA. You’ll get the advantages of tax-free growth on your investments, a full range of available investments and tremendous flexibility on taking out your money. So a Roth IRA makes a surprisingly good vehicle for college savings, though it isn’t without some drawbacks.
Inside a Roth IRA, your investments can grow tax-free, and you’ll be able to withdraw contributions at any time without a tax penalty. You’ll even be able to withdraw earnings on those contributions tax-free as long as the account has been open for at least five years and the money is used for qualified educational expenses.
While the 529 plan is probably a better bet for college savings, say experts, the Roth IRA does offer a number of positive benefits. However, one key downside is that you’re tapping your own retirement plan, and while you can borrow to pay for a college education, no one will lend you money to fund your retirement.
Saving money can be difficult even when times are flush, but it becomes even more difficult to do so amid a tough economy caused by the coronavirus and the government’s response to it. Nevertheless, savers do have some opportunities to increase their savings and then use tax-advantaged accounts to keep more of it for their needs.