SCOTTSDALE - Are you saving enough to send your child to college? What type of loans should you get?
There's a lot to know about money and planning before your kids or grandkids go to college so David Tibbets with Charles Schwab in Scottsdale stopped by ABC15 Mornings to shed light on some of the common myths about college finances.
Would you guess fact or fiction for these common myths?
1. Parents should prioritize college savings over retirement since they have less time to save for college.
Fiction: Many people believe that they should stash money for college instead of their own retirement funds because college comes earlier than retirement. In reality, it's usually a better idea to make sure you're set for retirement before dispersing funds to a college savings account. Tibbets makes a good point- you can always get loans, grants or scholarships for education, but there really isn't anyone to loan you retirement money.
2. Today's newborns will need more than $300,000 for in-state public university tuition.
Fact: Though alarming, adding a six percent inflation cost to today's tuition costs, it could cost around $300,000 dollars to send one of today's babies to college in the future. Today it costs about $23,000 a year for a public university. This comes to about $100,000 for four years, so it very well could cost about three times that amount by the time college rolls around. A private school could cost about $600,000.
3. Parents should begin saving for college by the time their child is 10 years old.
Fiction: If you start when your child is 10 years old, you have just about eight years to save for college. You should start saving as soon as you can--from the day they're born if possible, or before. Every little bit adds up, but save as much as you can each time so you have less to pay off in the future. Tibbets says to treat it like a 401K--put as much into the fund as soon as you can.
4. A 529 plan allows potential savings to grow tax deferred.
Fact: If you put your money in a 529 account, you get to have savings tax deferred. In addition, when you make withdrawals for education purposes, those are tax-free as well. Tibbets says that at Schwabb, they feel 529 accounts are the best way to save for college.
5. To avoid market volatility, parents should avoid investing college funds in equities.
Fiction: College costs are rising each year, so you really should invest in equities. When you have a long time frame, you should try 95 percent equities, five percent cash options. When you're about three to five years out from college, try a 60 percent equity, 40 percent cash option. When you're about a year or so out, you want to go with a heavier cash option like a money-market fund or CD.
6. Parents, relatives and friends can contribute to a child's 529 account.
Fact: If more family members want to help with college finances, it's perfectly OK. Often times, grandparents want to help contribute to sending their grandchildren to school. An individual can invest $14,000 without being taxed and a married couple can invest $28,000. There are other tax exclusions that Tibbets mentioned, but for more information, contact Schwab. These options are good things to talk out with your tax or financial advisors. It's a good way to stock away a lot of money in a short amount of time.
7. A child can only be a recipient of a 529 account or education savings account, not both.
Fiction: You can participate in both! Each type of account has the same tax benefits, but education savings accounts and ESAs differ in which types of schooling - elementary, secondary, college, etc - for which you can use them.
8. You should pay off student loans before putting money into a 401K.
Fiction: Take care of yourself first, Tibbets says. If your payments for student loans aren't too high, consider investing in a 401K because they offer a 100 percent return on an investment. Try to put the amount that your employer is willing to match so you can get the most for your money.