Back-to-School Financial Planning: Preparing for Education Expenses and Beyond

With back-to-school season almost upon us, this is a good time to focus on the financial aspects of sending the kids back to school, whether this is elementary, high school or college. Beyond this year, this is a good time to do some financial planning for future schooling expenses. When it comes to planning for college, you do not want to be unprepared financially when the time comes.

Assessing Education Expenses

Most experts are saying that this will be one of the most expensive back-to-school seasons in history. Textbooks, school supplies and fees for activities will all be higher than in past years. For those sending students off to college, add in the cost of transportation, rent and food if they are living off campus. It is likely that the cost of living in the dorms will be higher if for no other reason than the impact of inflation on the cost of food for meal plans.

It is best to start with a list of what will be needed by your student for their return to school. Also, be sure to indicate if the expense is a one-time expense or something that will be needed at various times during the school year.

Creating a Back-to-School Budget

Like any other major expenses best to compile a back-to-school budget. This is especially important if you have more than one student and also if they are attending different levels of schooling.

Back-to-school can be a good time to teach your children about budgeting, which is one of the most important financial life lessons they can learn. Obviously, gear this to the child’s age. Certainly, with a high schooler or a college age student, they have a higher level of understanding and can be more involved in the process. A good way to do this is to get them involved with compiling the back-to-school shopping list.

While setting a budget prior to starting your back-to-school shopping is desirable, compiling this budget all through the year, along with a schedule of when these expenditures will need to be made is a best practice in terms of planning.

Exploring Education Savings Options

There are a number of college savings options for college expenses. As with any type of major financial goal, starting as early as possible provides time to accumulate the funds needed.

A 529 plan is an option offered by most states that allows contributions to grow tax deferred. Contributions are deductible at the state level in some states, but not at the federal level. The money in the plan comes out tax-free as long as it is used for qualified expenses. In some cases, a portion of the money in a 529 may be used for certain K-12 expenses as well.

A portion of the money can be used to repay the account beneficiary’s student loans, as well as the student loans of any siblings. Additionally, the recently passed Secure 2.0 legislation allows for up to $35,000 left in a 529 plan to be diverted to a Roth IRA for the beneficiary. Besides parents, grandparents and others can also contribute to a 529 for a beneficiary.

A Coverdell ESA is a trust account created by the U.S. government to assist families in saving for college expenses. The beneficiary must be under 18 when the account is established, although there is an exception to this for special needs beneficiaries. The maximum annual contribution is $2,000 per beneficiary. The distributions are tax-free as long as they are used for educational expenses. ESA funds can be used for grades K-12 as well as for college.

Custodial accounts, also known as UGMA or UTMA accounts, are created for your child and managed by the parents. Once the child reaches the age of majority in their state, anywhere from 18 to 21 in most states, the money becomes theirs. Custodial accounts do not offer the same tax advantages as a 529 or Coverdell account, but they can be a good choice to cover expenses that cannot be covered by a 529.

Maximizing Education Tax Credits and Deductions

There are a number of educational tax credits and deductions to be aware of.

  • The American opportunity credit is a credit that allows you to claim up to $2,500 in credits as long as you paid that much in fees including tuition, books and supplies toward as an undergraduate in the past year. There are income limits that apply to claiming this credit.
  • The lifetime learning credit allows you to claim 20% of the first $10,000 paid for tuition and fees. Note there are income limits on the ability to receive this credit.
  • In some cases, you may be able to deduct interest paid on student loans.

Financial Aid and Scholarships

Financial aid and scholarships can play an integral role in funding your child’s college education. Each year, your child should complete the FAFSA form, which is the federal financial aid application. Beyond any federal loans or grants, most schools use the FAFSA as part of their financial aid and scholarship process.

Have your prospective student look for scholarships. These may be available through a variety of organizations. They should do a lot of research as there are a number of scholarships and aid opportunities out there.

Teaching Financial Literacy to Children

One of the best lessons that a parent can teach their children is financial literacy. This can start at an early age through their allowance and teaching the concept of saving. Involving them in the back-to-school shopping process can help show them how much things cost. Teaching them how to budget can be a lifelong gift. Financial literacy is as important as anything else they may learn in school.

Beyond Back-to-School: Long-Term Financial Planning

When planning for college expenses, this should be part of your long-term planning just like other long-term goals such as retirement. Be sure to allocate funds to saving for college as part of your financial planning objectives.

Your Wedbush financial advisor can help with short and long-term educational planning. Be sure to discuss this topic in your next review session.



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