Take From Your Savings
Now Is the Time to Use Your Money
Now that you are exploring your college options, you also have to think about how to help pay for your education. It may be the most worthwhile investment in your future that you and your family ever make.
Most families pay for college using three sources: prior income (savings), current income (salary and wages) and future income (borrowing).
Your Resources
Like most students, you will probably receive some type of financial aid (grants, scholarships, work-study and loans), to help you pay for college. However, this probably won’t cover all your costs.
You may have some money saved up — either from working or gifts you received. Or you may even have an account that’s been set up by a family member in your name to help pay for your education. Now is the time to put these resources to work.
If you receive financial aid, you are expected to contribute from your savings toward college expenses. Each year you’re in college, you are expected to contribute 20 percent of your assets to cover your costs.
If you’re not receiving financial aid, you need to decide how to spend your savings. As a rough guideline, divide the total amount of money you have by the number of years you plan to be in school, plus one more year. That way, your money is divided evenly over your school years, with a portion of it remaining for when you graduate.
For example, if you plan to graduate in four years, divide by four plus one — a total of five. Then you can spend one-fifth of your savings each year and still have one-fifth left over when you graduate to help you get started.
Family Resources
If your family has available assets such as savings or mutual funds, plan to use some of that money for college. Calculate your Expected Family Contribution (EFC).
IRA Accounts
If you or a family member has an Individual Retirement Account (IRA) or Roth IRA, you're permitted to withdraw money for college expenses, without paying any early withdrawal penalty. However, you might owe income taxes on some of the amounts withdrawn.
Education Accounts
Your family may also withdraw funds from any Coverdell Education Savings Account or 529 plan. Most plans do not require you to pay taxes on the amount withdrawn if the money is used for education expenses. Learn more in IRS Publication 970, Tax Benefits for Education.
This information is general in nature and should not be construed as tax or financial advice. Consult your tax adviser or financial planner for more complete information.
