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The Best Ways to Spend Your College Savings

Rebecca Cohen  |  June 11, 2020

Hint: don’t let it burn a hole in your pocket.

Note: This story is sponsored by College Avenue Student Loans 

With prices for both public and private colleges continuing to climb, tuition costs can run into the tens of thousands of dollars. This doesn’t even account for room and board, application fees, school supplies and textbooks, and cash for special programs and extracurriculars… and of course, no bank is going to give your child a loan for when they exceed their data plan on their cell phone. 

That’s why so many parents have amassed a college nest egg even before their offspring take the SATs. According to a recent College Ave Student Loans survey of college parents conducted by Barnes & Noble College Insights, 70 percent plan to cover the cost of college with a mix of savings and income. Savings can include a mix of 529 and Coverdell College Savings accounts, cash on hand, and help from Grandma, Grandpa and anyone else who will give it.  

But once you have your savings — and your child’s college acceptance letters — there’s often a lack of knowledge about the best way to use those funds to a) maximize any tax advantages, b) bolster opportunities for financial aid and c) make it go as far as possible.  Here are a few suggestions. 

I’ve Saved. It’s Time to Spend, Right? 

Wrong. The best way to figure out how to spend all of your college savings is to work backward. 

  • Start with your totals. Tally up your savings and compare your final number to the cost of your student’s top college choices.  It may help you decide on a school to compare the final numbers of a couple — perhaps a less expensive public university to a pricier private college. Will what you’ve saved cover tuition and other costs for 4 years? What will you still owe? 
  • Factor in the results of the FAFSA. Even if you think you’re not likely to receive financial aid, it still pays to submit the FAFSA and see what comes back. The financial aid packages you receive from different schools will break down the offers for need-based grants, scholarships and other merit aid that don’t have to be repaid from loans, which do.  Subtract the amount you’ll get in both types of aid from the annual cost of the school to see what your family will have to pay each year. 
  • Divide and conquer. You don’t want to use all your college savings upfront, because you could run out of money, and grants and scholarships can change from year-to-year. Instead, take each year individually, and try to spread your savings out equally. Federal loans (the ones you’ll want to use first because they’re cheaper and therefore easier to pay back) have an aggregate cap per year, says Mark Kantrowitz, publisher and vice president of Research of Savingforcollege.com, so it’s important to factor that in.  If, for example, you spent all your college savings on your first two years, you might find yourself in a position of having to borrow more for your remaining years. Instead, try to work the math to make sure you maximize your ability to take federal loans in the student’s name each year, as these offer certain benefits and protections not offered by private loans.  And, if you find you still have a gap to cover, private student loans can help cover the costs. Make sure to shop around for one, like those from College Ave, that offer flexible repayment plans, competitive rates, and great customer service. 

Make the Most of Tax Credits to Lower Your Bill

Financial aid isn’t the only source of help you can get to supplement the money you’ve saved for college.  There are two important tax credits for the taking.  The American Opportunity Credit is worth up to $2,500 but there are income limitations.  Your modified adjusted gross income needs to be less than $80,000 (singles) or $160,000 (married couples filing jointly) to take the full credit.  The Lifetime Learning Credit is worth $2,000 at most, with lower income requirements.  And note, you can only claim one credit in an individual tax filing year. 

What If It’s Still Not Enough?

It may not be. If your child is working a part-time job while in school, ask the student if he or she will channel the money towards out-of-pocket expenses, advises Kalman A. Chany, President, Campus Consultants Inc., and Author, The Princeton Review guidebook “Paying for College.” Why? Because expenses for things like food, clothing, and incidentals can’t come out of a 529 account, and they need to be paid for somehow. 

The Bottom Line 

Yes, college is expensive, but there are so many different ways to save and spend to get your degree. Sitting down with a financial planner or an accountant to go over everything you have saved and everything you’ll need to spend can help you fully understand the lay of the land, and get a handle on any tax credits and benefits that may be available to you. A professional can also help you adjust your risk and decide on a potential payment plan for any loans you have to take out. No, there’s no single “right” way to pay for college, but you can’t go wrong by getting started saving early and laying out a tentative plan. 

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