Personal Finance

Saving for Your Child’s College Education

college savings tin canIt’s the dream of every parent: their child goes off to college. But for many schools across the country, the costs that come with attending an institution of higher learning are prohibitive to the achievement of that dream. Student loans are one option, but the numbers for student loan debt are staggering.

Nearly 1 out of every 5 families that have borrowed money for tuition are at least $50,000 in hock by the time their child graduates. Eliminating that debt could take years, certainly much longer than the term of a four-year college program. With the rising costs of just about everything these days, the numbers are likely to increase exponentially for anyone looking to enroll in college.

Many parents have begun to start saving early, right after the birth of their child, so that they have enough squirreled away for when their little bundle of joy is ready to leave the nest by the time they reach their 18th birthday. Unfortunately, saving for college is not a reality for too many lower and middle class families struggling to stay in their home, keep the lights on, or even put food on the table, much less try to put away a few bucks here and there for tuition costs.

While a troubling majority of these families will set realistic expectations for saving up for college, they will likely fall far short of their intended goals. It’s more than likely that the little money they have saved will need to be supplemented by student loans that will hang like an albatross around their neck long after their child has graduated.

Luckily there is some hope.  We have a number of ways to make saving for college easier to plan and accomplish so that you not only reach your financial goals but your child can also achieve their dream of attending college. We’re going to break it all down for you, from the costs you’ll need to budget most accurately to the savings plans and strategies that will get you where you want to be when you want to get there.

The Costs of College

What are we talking about exactly when we mention college costs? Tuition is usually the first (and all too often only) thing that comes to mind.  Yes, tuition is a major piece of the pie but there is a litany of other expenses to be factored in to the costs of college as well.

Tuition and applicable fees are what you’re paying to attend classes.  These numbers can fluctuate based on the school, the type of program, whether it is a private or public institution, the credit hours necessary to earn a degree, and, an important facet of the equation, whether or not you reside in the state where the school is located.

Schools often provide students from within state a discount to attend.  Others that are looking for a more diverse student roster offer some incentives for out of state students to take courses as well. It all depends on the school in that regard and you can do some research to find out which of these discounts apply to your particular situation.

Then there are the other living costs, such as room and board. For some schools, these expenses are integrated into the tuition and fees as a comprehensive package deal, but you will also find some institutions that consider these costs separate. Room and board is pretty self-explanatory, these are the costs of living on campus while taking courses at school.

They also tent to include a meal plan for students who can then go to the school commissary or cafeteria and grab breakfast, lunch, and dinner. Most schools offer different plans which provide additional perks. If the student opts to live off-campus in an apartment or live at home if the school is nearby, then these expenses can vary.

The price of books and school supplies is often underestimated yet no less important than the other expenditures we’ve discussed thus far. The cost of these items reach staggering proportions.  Some textbooks in certain courses can cost well over $100 depending upon the class. That’s the retail cost of a new book, which is why so many students seek out used copies to purchase at drastically reduced prices or rent from a student who has taken the course previously.

Finally, there are the little things, the costs you probably don’t even think about, but should, as they too can add up to a considerable amount of money out of pocket. I’m talking things like transportation, public or private, as you need to decide how your child is going to get around. Will they need a car, because then you’ll also need to account for the related costs of insurance, parking and gas. If no car is needed, then will the bus or subway be sufficient (and safe) enough to get your college student from one end of the campus to the other? Perhaps a bicycle is the answer?

Personal expenses are also important to consider, expenses like the cell phone, laundry, groceries, health insurance, and the day to day stuff college students buy should also be budgeted for in any type of long-term financial assessment for college.  Don’t forget about travel costs for when you want to visit or when your child needs to come home during school breaks, too.

All of these together make up the bigger picture of the true cost of an undergraduate college education. That’s four years and a diploma. Going to graduate school brings with it a whole new list of expenses, but first things first.

The Strategies for Saving

Saving for college is like any other financial goal, it takes careful planning with a sensible strategy for getting you to the finish line. Although you may not know which institution you or your child are targeting or exactly how much it’s going to cost, the average cost of a private university is currently about $42,000 in tuition and various fees. That number is quite a bit lower for in-state public colleges and only slightly less than private schools for out of state students looking to attend a public institution.

At those prices, it’s crucial that you not only get started early on the road to building that college fund but figure out ways that will allow you to put away the most money possible, so you’re properly prepared to pay for your child’s education wherever they want to earn their degree.

now-1272358_640Start Now

“Now” can mean very different things to different people because your child could be unborn or nearing their teenage years. Either way it can have a real impact on the amount you end up saving by the time he or she is ready to matriculate. So we’ll just assume for the sake of example that you’re planning on having a child in the very near future and you’ve already started to think about college. Saving before or even right after they are born can add up to a considerable amount of money by his or her 18th birthday. The more you save and the sooner you begin, the more you have when the time comes to leave for school.

Establish Goals

Strategizing requires a full analysis of how much you can realistically put away each month and how long you have to save for college. If you’re starting as your child is born, you will devise a specific plan with certain goals that might look very different than if you begin saving when your child is already a teenager. Establishing these goals early on is a good way to motivate and prepare you to budget your wealth from month to month so you can accommodate a savings plan for college.

Budgeting Your Finances

That month to month payment strategy is going to come with a need to rearrange your financial picture and current spending habits. Just because you’ve decided to put away some money for college each month doesn’t mean that your other fiscal responsibilities will get put on the back burner. You still need to meet your commitments, whether it’s paying off the credit card or taking care of your utility bills.  That means you’re going to need to re-prioritize where and how you allocate your funds. Frivolous expenses will need to be curbed and you might be forced to eat out less or forego certain things to be able to save enough to meet your goals.

Set Up Automatic Payments

One way to ensure that you’re able to put away enough every month and not have to worry about making sure it gets done is by setting up an automatic payment option into whatever savings account that you’ve established for your college fund. This way you know the money is deposited every month and you don’t even need to think about it. As for that savings account, you have a variety of plans available that provide different conveniences and tax incentives to make saving easier for any household income.

Pick From One of Many Plans

We’ve talked about the various strategies for saving, but you also have some options with respect to the type of account you select for investing that money. Savings plans range from those that are designed solely to cover education expenses to retirement accounts that can also be applied for tuition costs. There are even accounts that let you pay ahead of time for schooling which helps you lock in a certain price for that tuition now and it can be applied later on, even if (and when) tuition costs have increased.

Just be aware that some of these plans are subject to penalties and fees for early withdrawal and some plans have limited availability in certain states. It is crucial that you do your research into the type of plans that are eligible for enrollment in your part of the country. Below are some of the more popular options that most families participate in to help save for their child’s college education costs.

529 college savings plan theme with textbooks and piggy bank529 Savings Plan

This college saving plan is among the most common types of accounts dedicated to paying for education expenses. The 529 comes in many forms but the gist of it is simple. You deposit money into this account – also known as a Qualified Tuition Program (QTP) – and you are able to withdraw from it for educational purposes like tuition costs and textbooks or other school-related expenses.

These types of accounts are currently offered in 30 states where you’ll find a variety of different investment options, fees and costs, and contribution limits among them. Most let you deposit small sums of money at first and then increase your contributions as you see fit.  Just keep in mind that some plans only let you make such changes to your account about once a year.

Although your mind is made up on your child attending college (there are no if’s, and’s, or but’s about it), circumstances do change.  If your son or daughter ends up not going to school, then you have a choice on what to do with the money you’ve already invested into that 529.

If you take it out of the account, you will likely be subject to penalties and taxes.  Alternatively, you can transfer the entire sum to an alternate beneficiary who can use the money for qualified education expenditures. Read our research on 529 plans here to understand how they can benefit your child’s college education.

Roth IRA

A Roth Investment Retirement Account (IRA) is an option most often used when saving for your retirement. More and more people are turning to these types of accounts to save for college tuition costs these days because they offer the freedom to withdraw money without taxes or penalties on qualifying items, such as using it for a down payment on a house or educational expenses. The latter is what you’re looking for, which makes it an ideal alternative for putting money away for college.

This option isn’t perfect for everyone as there are contribution restrictions of up to $5,500 a year or $6,500 if you’re over the age of 50.  Also, unless you’re earning less than $129,000 per year as an individual or $191,000 as a married couple, you’re not eligible to invest your money into a Roth IRA at all. Anyone making more than that per year is going to have to try one of the other alternatives we’ve listed here.

Here’s the best part, though.  If your child doesn’t end up going to college, you’ve already got a pretty great nest egg for your retirement.

Coverdell Savings Account

This is another educational expense account that offers similar tax advantages to the 529. The benefit of this type of account is that you can decide to save the money for college or apply it to schooling costs for grades K-12. There also comparisons to the Roth IRA in that there are eligibility limits and contribution restrictions that are inherent to this type of savings plan.

For instance, you’re limited to just $2,000 in contributions annually for each child and individuals making more than $95,000 or $190,000 for couples are not eligible to participate. Also, if there are any funds still in the account by the time your child reaches 30 years of age, you could get taxed on earnings.

Prepaid Tuition

This option might sound too good to be true, but I assure you that it’s a savvy and very real way for saving potentially thousands of dollars on your child’s tuition and fees. What you do is pay for your child’s tuition now or in the near future, when prices are at their current levels. Then, when your child has grown up and the cost of tuition has skyrocketed in the subsequent 10 or so years since, your investment will gain value.

For example, let’s say you want to send your kid to School X which has a tuition cost of $25,000 a year. If you pay for half now, to the tune of $12,500, you’re locked in at having covered 50% of the cost now. When your child is ready to start freshman year and tuition has increased to $30,000 a year, that $12,500 you put down is now worth $15,000 as you’ll still be credited for having paid for half the costs already.

You can find prepaid tuition programs in a handful of states across the country. However, do some research first into which ones are still taking enrollees as not every state has openings for new students.

Upromise

This is a more unconventional approach to saving for college but still effective nonetheless. Upromise is a website that you sign up to join and it will give you cash back on certain items you purchase online, much like any cash back rewards credit card. Only in this case, the money you get back goes directly to a 529 savings account.  The more you spend, the more cash you can get back, but only on eligible purchases.

You won’t earn rewards on everything you buy, so you’ll have to see what items qualify. It’s easy to get on board, too.  You just register your credit cards or grocery cards to earn rewards or apply for a Upromise credit card where you can earn up to 5% back on purchases, 4% at restaurants, 3% on gas purchases and more.

Gift of College and LEAF Savings

These are two websites that allow friends and family to purchase gifts that can be deposited directly into your 529 savings plan. Buying the gift is easy to do, too.  Once you sign up anyone can log in and arrange for a gift contribution to be made to the fund in lieu of more traditional presents that may fade over time.

Sure, your young child may not be too thrilled about not getting that hot toy or some other cool gift from Uncle Steve or Grandma Ruth when they find out they’ve received money that they can’t use or access instead. One day they’ll certainly thank you later for the funds that have accrued from all of those Christmases and birthdays of their childhood. Right…?

Our Final Thoughts

Saving for your child’s education is no easy task, nor should it be taken lightly. College costs are on the rise annually and the sooner you get started the more it will benefit you and your child. With the average cost of college already at $42,000 a year and the rate of inflation fluctuating as it’s been lately, the numbers can quickly get pretty overwhelming. The final amount you need to save can jump exponentially and the later you start putting money away the less prepared you’ll be to offset the costs.

For example, the current average cost of college is $42,000 a year.  At a rate of inflation at around 5%, college will cost upwards of $53,000 in five year’s time.  By the time your child reaches their fourth year of schooling, annual tuition costs will increase up to $57,000.

Let’s say you’re going to devote 25% of these costs from your savings account. That means you’ll still need to come up with the remaining 75% on the aggregate total of around $225,000. In other words, you’ll need to come up with almost $175,000 in savings if you want to avoid having to take out student loans for college.

Those are some serious figures and that means you need to decide on how you’re going to save that money and when you’re going to get a jump on those lofty numbers. As we discussed, putting aside just $50 a month from the time your child is born can be a serious boon to your financial picture.

But maybe you didn’t start saving when your child just entered the world and your kids are nearing their teens now. You haven’t set aside a dime. That doesn’t mean you’re totally out of luck, but the urgency is definitely there and now’s the time to start saving.

If you’re behind the 8-ball, have a discussion with your kids about their college plans. If money is tight, there are plenty of financial aid programs available at just about every college and, if all else fails, there is always the student loan route if you just haven’t saved as much as you need. The good news is that you can still save and minimize the amount that you’ll need to borrow. Every little helps and even a little can go a long way to borrowing less from the bank.

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