As a parent whose child (or children) might attend college someday, you’re likely aware of the fact that higher education is expensive.
Can you help your children with their college goals? If you’re a federal government employee, the answer is yes. However, doing so requires an honest financial assessment, careful planning, and following these four steps.
Step #1: Assess Your Retirement Needs
Retirement planning and college education funding can seem diametrically opposed. However, guardians who sacrifice retirement contributions to ensure their children get a college education can face financial trouble when they are no longer employed.
Don’t be those parents. As much as you want to support your children, your first goal should be to set aside enough so that your post-career years are comfortable. Be sure you’re contributing enough to your Federal Employees Retirement System’s Thrift Savings Plan to receive a full federal match. Also, analyze your retirement contributions annually; your allocations will change depending on where you are in your life.
Once you’ve determined your retirement goals and contributions, you can focus on what to set aside for your children’s higher education goals.
Step #2: Evaluate College Savings Goals
On average, a four-year undergraduate education costs $38,270 per student per year. This includes tuition, fees, living expenses, books, and supplies. However, the cost can vary depending on the school’s location, whether it is state-run or privately owned, and other factors.
To reiterate, higher education is expensive.
By starting early, you can build a strong foundation for your child's educational future. Many families successfully create strategies to cover a meaningful portion of college expenses through thoughtful saving and planning.
Open conversations with your child about college dreams and goals help create a shared vision for the future. If your child aspires to attend a prestigious university like an Ivy League school, you can work together to explore multiple funding pathways. Many students successfully combine family savings with merit-based scholarships, grants, and loans to attend their dream school.
If your child doesn’t want to pay back student loans, the discussion should probably focus on attending a less expensive, quality school.
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Step #3: Determine Ways to Save
Interest-generating, tax-advantaged college savings plans for federal employees include the following:
529 Plans
Also known as a “qualified tuition plan,” 529 plans are authorized by Section 529 of the Internal Revenue Code (IRC) and are sponsored by states, state agencies, or federal institutions. When it comes to your child’s college education, it also means that interest in and withdrawal from a 529 plan is tax-free, as long as it’s all used for higher education expenses, like tuition, room and board, or supplies.
Roth IRAs
While Roth IRAs are known as retirement plans, they can also help pay college or university expenses. These plans are limited to contributions of $6,000 per year (as long as your Modified Adjusted Gross Income is below a certain amount). While withdrawals aren’t penalized when used for higher education purposes, they are taxed as ordinary income.
Coverdell Education Savings Accounts
A Coverdell education savings account is another tax-advantaged program, this one authorized under the IRC’s Section 530. Like 529 plans, Coverdell ESAs cover tuition, fees, room and board, and other college or university expenses. Unlike 529 plans, the Coverdell ESAs limit contributions to $2,000 annually, making them a less attractive option for many. Similar to Roth IRAs, eligibility to contribute to a Coverdell ESA also depends on your MAGI.
Step #4: Explore Federal Education Benefits
One must-do on the college funding list is encouraging your child to fill out the Free Application for Federal Student Aid (FAFSA). This puts your child in line for all kinds of government aid, including federal grants, loans, work-study programs, school assistance, or state funding.
Furthermore, as a federal employee, your child could be eligible for a Federal Employee Education & Assistance Fund (FEEA) scholarship. FEEA awards merit-based scholarships to federal employees, spouses, children, and grandchildren.
Balancing College and Retirement Savings
College is an investment in your child’s future. The good news is that balancing TSP contributions with 529 or other plans can be done with careful planning.
An additional thought is to engage the service of a Certified Financial Planner™ with a background in federal government benefits, like those working with Serving Those Who Serve. These skilled CFPs® can help you put aside the right amount for your retirement while working with you to set up and contribute to tax-advantaged, interest-growth accounts that help support your child’s future educational needs. They can also help you revisit your financial strategy to ensure that contributions continue to match your changing priorities and financial goals.
For a free consultation with the experts at Serving Those Who Serve, visit the website or email [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
