Now that it’s August it feels almost impossible not to be thinking about going back to school whether we like it or not! The summer provides a bit of relief from money and loan talk; I hope this post helps ease the transition. As you consider plans for your child’s education or repaying student loans, I’m outlining a few things that we often talk about with clients.
Start saving now
One of the most important decisions you can make for college savings is to start today. By beginning early, your money will have time to compound. That is where a big share of your value will come from over time. Start by determining what fits your budget or how much you ultimately want to fund. Work with a fee-only financial planner to determine what works for you.
529 plan versus other ways of saving
A 529 plan is an investment account to help pay for qualified educational expenses. That is the important distinction over other accounts. If the money is not used for qualified educational expenses, you’ll owe taxes on the investment gains, plus a penalty of 10 percent.
Almost every state offers its own plan. While contributions cannot be deducted from federal income tax, 34 states offer a tax benefit. You must enroll in the state-sponsored plan to receive the tax benefit, but you can open an account across state borders. Not all states offer tax breaks to residents who open and contribute to their 529 plan. State plans vary in terms of fees, minimum and maximum contributions, and investment options. Be sure to check out all the features of your own state plan versus others.
Another option to pay for education is by way of a taxable account. You may have more options (or less limitations) than a 529 plan. Capital gains are not taxed until they are sold which means you keep the capital gains tax-free in an account for a longer period for more growth.
A third option is a Roth IRA. Money in these accounts can grow tax-free and can be withdrawn tax-free after age 59 ½. This fun fact highlights the flexibility of the Roth IRA, but the disadvantage could be a hit to your own retirement. It’s important to look at your comprehensive financial picture to determine what makes the most sense for you.
NEWSFLASH on student loan payment extension
Last Friday, August 6, 2021, the U.S. Department of Education announced a final extension of the student loan payment pause until January 31, 2022. The pause includes several relief measures for eligible loans including a suspension of payments, zero percent interest, and stopped collections on default loans.
Even with this news, though, be sure to open your mail! It sounds like notices will be sent 21 days before payment is due. Be prepared for payments to resume – know the date your monthly payment due date (if you were using auto debit, this will resume), the amount, and/or if you need to recertify. A few other tips:
- If you’ve moved or your bank information has changed, update your contact information with your loan servicer (this is super important!) and in your Student Aid profile.
- Check out the loan simulator to find a repayment plan that meets your needs and goals or decide whether to consolidate.
- Finally, consider applying for an income—driven repayment plan. It’s not for everyone, but IDR plans can make your payments more affordable depending on your income and family size.
A note on Public Student Loan Forgiveness
Those already on PSLF track and have continued to work full-time for a qualifying employer during the suspension period will receive credit toward PSLF. You may have to submit a PSLF form certifying your employment for the same period to see this reflected in your account. It is always a good idea to complete the form annually or when you change employers to ensure you’re on track.
Having a financial plan can help ease the anxiety associated with education costs. Be sure to consider all your financial goals when thinking about college, loans, and other planning topics. While general advice can be a good guide, we all have our very own objectives to understand. I encourage you to have a holistic plan that considers your unique variables and assumptions.
Kelly Luethje, CFP®, is Founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain or by a lake working virtually with clients across the country across the country.