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How to Spend College Savings

One hundred dollar bills with a graduation cap

You’ve been tucking away money for your child’s education for years. Now it’s time to tap the money and start paying for college. Optimize your college savings with these tips.

Extend your savings period. Save for as long as you can. Allow money to grow tax-deferred in an account like a 529 plan. If you have other resources to help pay for college, such as financial aid or scholarship funds, use those first.

Utilize money in 529 plans. How soon you tap money in a 529 plan to pay for college expenses depends on how much you have saved.

  • Paying for one year of college. Wait to spend the plan money until a student’s senior year of college. The aim is to pay for the senior year with money from the 529 plan only — no loans for the students that year and no additional use of parents' savings.
  • Paying for more than one year of college. If you can pay two years’ of college with a 529 plan, start spending the money during a student’s junior year. If money in the plan covers three years of college, start spending in the sophomore year.
  • Paying for less than a year of college. Save the 529 plan money for the final semester of a student’s senior year. Use other savings and student financial aid to pay college expenses until then.

When to access. Be safe with your investments. If you’re going to use 529 plan money to pay for your child’s next semester of college, move that amount of money into a money market or savings account the year before you need it.

Know when to hold them. Be savvy about spending 529 plan money when you have other savings options to pay for college.

  • Hold low. If your investments in the 529 plan have a bad year, use other savings to pay for college.
  • Sell high. If your investments have a good year, move a semester's or year’s worth of money from the plan to a money market account or saving account, and use that money to pay for college.

Not enough saved? Find other ways to pay, including financial aid, such as grants, scholarships, and loans. Encourage your student to choose a community college or state school for the first year or two.

Utilize tax credits or deductions. If you pay for some of the expenses out-of-pocket, you may be eligible for tax credits or deductions. For example, if you need to spend $2,000 on room and board, you might want to use 529 plan money and save out of pocket money for educational expenses that qualify for IRS credits (e.g., the American Opportunity or Lifetime Learning Credits). The tax rules often change from year to year, so review your situation with a tax advisor.

If you have questions about saving for your child’s college education, or if you have questions about disbursing your savings, speak with a financial planner.

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]

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