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Thayer Partners Blog

Financial Planning: Using Your Company’s 401K to Save for College

[fa icon="calendar"] Jul 29, 2016, 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Financial_Planning-_Using_Your_Companys_401K_to_Save_for_College.jpgFor most companies, a 401K plan is a vehicle to help employees save for retirement. That’s not all it can be doing, though. In fact, your company 401K can help employees save for another expensive life event: College.

The Skyrocketing Costs of College

It isn’t all that surprising to learn that many Americans worry about how they’ll pay for their children’s college educations. The average cost of tuition in the United States is $32,405 per year at a private institution. While tuition is generally less at state institutions, the bottom line is that college is expensive, and few people can afford it without scrimping and saving for a number of years. Even when people do save, their efforts are often not enough. Parents worry that college education for their children will mean a huge debt load, whether it’s their child or they themselves picking up the tuition tab.

While there are excellent options for parents and college-aged children to combat the costs of tuition in the United States, most people still need to do some financial planning to fund their kids’ college education.

The Problem

Many Americans feel they have to choose between saving for their children’s educations and saving for their own retirement. Both are costly events that require plenty of financial planning, and, often, people feel there’s simply not enough money to save for both at the same time. With many media reports about graduates with heavy debt loads and retirees who risk running out of money, it can seem like an impossible choice.

The Solution

What if your company made it possible to save for both retirement and college at the same time? The Sage Scholars Tuition Rewards program is helping people do exactly that. Employers can offer enrollment in the program to their employees as a voluntary benefit, and they can opt to use their 401K plan to determine how many Tuition Rewards points enrolled employees earn. Typically, the program pays 5% of the value of the employee’s account on an annual basis. For example, the program would award 5,000 points (equal to $5,000 in college tuition) on an account valued at $100,000. As the value of the account increases, so too does the number of points awarded. This can give employees added incentive to contribute to their 401K plans—ensuring that they’re saving not only for retirement but for college too.

A Versatile Program

Sage Scholars Tuition Rewards points are currently accepted at 355 private colleges and can be used to pay for up to 25% of a student’s annual tuition. Over the course of 4 years, that works out to a free year of college—which could be more than $45,000!

Enrolled employees earning Tuition Rewards points can be parents, grandparents, or even aunts and uncles who want to help family members go to school. There’s no limit to the number of points that an employee can earn and the points in their account never expire, but the tuition is capped at 25% of tuition up to a specific dollar figure. To use points, they simply name an eligible family member and transfer points to them by August 31st of the year the student starts Grade 12. Unused points can be transferred back to the sponsor account, and then to another eligible student.

The Bottom Line

Using your company’s 401K plan to help save not only for retirement but for college too is clearly a smart move. By partnering with the Sage Scholars Tuition Rewards program, your company can help fund college and retirement at the same time, using an asset you already have. Now there’s no need to choose between saving for college or retirement.

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Topics: 401k, Financial Planning

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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