Steps Towards a Debt-Free Education

These are the steps Jennifer needs to follow to ensure her kids have a debt-free education opportunity:

1. Defining the Goal

Jennifer is comfortable with the public education system in their district and plans to send Dillon to public school through high school. She is determined to pay for Dillon’s first four years of college to ensure he has the same debt-free opportunity she had starting out.

2. Analyze the Cost

Jennifer wants to pay for 4 years of school, starting in 18 years. Although she doesn’t know which school Dillon will go to, she chose her alma mater as the baseline for the cost.
After running the numbers, Jennifer has figured out the amount she needs to have for Dillon.

3. Create an Action Plan

Jennifer calculates the amount she will start saving every month for Dillon’s college with the quantified goal. Because she has a longer time horizon, she plans to invest this money so it can work for her too.

4. Use Efficient Accounts

Jennifer goes online and opens a 529 plan savings account for Dillon. This account allows her to add money every month and not worry about paying tax on the growth. Because Jennifer lives in New York, she opened a New York 529 Plan account. As she adds money, she will get to take a tax credit on her state return when she files in April.

5. Realizing the Goal

Fast forward 18 years when Dillon starts college. His 529 plan account is quite large since his mom has been saving for years. Jennifer can now make a withdrawal from the account to cover all of Dillon’s education expenses, and because all the funds are used for education, there is no tax or penalties associated with the withdrawal.

6. The Twist

After Dillon’s first year of college, he received a scholarship! He doesn’t need to take more money out of his 529 plan, so the money is now just sitting in the account. In this case, Jennifer can still make a withdrawal equal to the scholarship amount and not have to pay taxes or penalties on it, or she can change the beneficiary to Dillon’s sister and use the money for her schooling.

Resources That Support Debt-Free Education

529 Plans:

Each state has an education savings account. If you live in a state with state income tax, it’s typically beneficial to open the 529 plan that your state sponsors because there may be income tax credits available.

The main benefits of using this type of account for savings are tax-deferred growth and tax-free distributions. This means that any money earned on your contributions is 100% yours to use for education instead of 80% yours and 20% the governments.

The catch is… all distributions must be used for qualified education expenses, but there is some flexibility with this account type since you can also change the beneficiary to another family member.

College Planning in Summary

College planning affects everyone, regardless of your income, savings, or abilities… and there is no one size fits all solution. Education planning looks different depending on your life stage, goals, and financial situation.

• Starting early produces the best results when it comes to savings.
• Being resourceful produces the best opportunities when it comes to financial aid.
• Being diligent produces the best potential when it comes to achieving your goals.

The key is defining what your goal is and then mapping a path to achieve it.