Predictions for the cost of a college education 20 years from now range from a little over $40K a year for a public institution to $130K for a private college. You might think that funding a college education is hopeless and give up before you even get started. Don’t! We’re here to help you figure out how to plan for your child’s college education.
Save, save, save
It can be daunting to save for your child’s education when you have a number of other pressing financial concerns: your mortgage and your retirement among them. If you have significant credit card debt, you’re probably feeling even more stressed.
That’s all the more reason to come talk to the team at United Financial. We know all the strategies for stretching a dollar. We’ll help you set up a plan that works for you when it comes to funding a college education. The first key is to save, save, save!
How much to save
If you don’t know where to start, try one of these two simple, straightforward approaches: the $2K per year plan or the one-third approach.
- Why 2K? The concept of $2K is easy: just multiply your child’s age by $2,000. If you start at birth, you’ll have $4,000 in a college fund by the time your child is two. By age 18, you’ll have set aside $36,000 for funding a college education.
The $2K plan assumes you’ll put that $2,000 into a 529 plan (more about that later). The strategy is to divide your total savings goal into annual contributions. Then take that $2,000 and divide into monthly or bi-weekly installments.
- Three thirds add up to funding a college education. This approach takes your projected total and divides by three. One third is the dollar amount you want to save for your child’s education. Another third will come out of your current income and the final third is how much you’ll need to take out in loans.
Too many parents fail to save because they get bogged down in the complexities of selecting which savings plan to set up and figuring out how much to save. The key point here is that regular contributions add up over time. Start saving early and save consistently.
Where to save
Where you save for your child’s education can make a difference. Financial advisors across the board list 529 college savings plans as your best bet. Not all plans are alike, so do some comparison-shopping before you settle on a plan.
Here’s how they work:
- Investment earnings aren’t subject to federal tax.
- In many states your investment earnings aren’t subject to tax as long as the money is used for qualified educational expenses.
- Different states offer tax credits or deductions, so check if the plan you’re interested in offers this benefit.
- Different plans charge varying custodial fees.
- Explore whether to invest in a prepaid plan. This option can lock in today’s tuition rate, but there are restrictions.
Overall, 529 plans for funding a college education offer a smart way to save.
Other savings plans
529 plans aren’t your only option. You should also consider the benefits these plans offer along with their restrictions:
- Roth IRA. Although Roth IRAs are primarily used for tax-advantage retirement accounts, funds can be used for qualifying college expenses. Before you withdraw funds, make sure to get the advice of a financial advisor to avoid any penalties.
- UTMA and UGMA. These are trust accounts (Uniform Transfer to Minors Act and Uniform Gift to Minors Act). There’s no limit to how much you can place in the trust account, but colleges do look at your child’s assets and might reduce the amount of aid they receive. Check with a financial advisor.
- Coverdell Educational Savings Account. In many regards, these accounts are similar to 529 plans. Coverdell ESAs are limited to $2,000 per child. Funds must be used by the time your child turns 30 or they might be subject to tax. Check with your financial advisor for other limitations.
With so many options for funding a college education, you don’t have any excuse for not saving. However, with so many options available, it makes sense to seek advice. You want to find the best option for your situation.
Funding a college education through savings is only part of the story. With tuition costs rising every year, you can feel like you’re trying to hit a moving target. Saving as much as you can is half your battle. The other half is reducing your child’s college costs.
Here are some strategies to reduce the cost of college:
- AP classes and dual enrollment. Your child can earn college credits while he or she is still in high school. That can save you a significant amount of tuition expense. Even when AP classes don’t result in college credits, scoring well on AP tests can give your child a boost toward getting into her or his college of choice – and open the door for possible scholarships to offset the cost of continuing education.
- Get through in four years. Every extra year adds a tremendous amount to the overall cost of college. The time for career exploration is while your child is in middle and high school—not the fifth or sixth year of college.
- Attend a community college. The first two years at state and private colleges tend to focus on general education requirements. These courses are offered at community colleges. Be sure to work with the college placement office to determine which credits will transfer. You won’t want to pay for your child to take a class a second time.
When you reduce the cost of college, you reduce the amount you need to save or borrow.
Learning the value of an education
Your child needs to know what a college education costs. Your child also needs to know what your expectations are for his or her financial contribution. In other words, if you can’t guarantee you can pay 100% of the cost of funding a college education, your child will need to help fill the gap.
Although many scholarships are based on financial need, others are based on academic achievement. Encourage your child to keep grades up to qualify for scholarships. Then help your child research and fill out the applications. Unlike loans, scholarships don’t have to be repaid.
Encourage your child to follow a one-third rule for his or her job earnings if possible. Expect one third of income to meet weekly expenses (gas and entertainment), one third for short-term goals (cars, game systems, smart phones or prom) and one third to be set aside for college. Adjust the portions to fit your and your child’s situation.
Make United Financial Credit Union your ally
When it comes to funding a college education, you need an ally. United Financial’s advisors can assist you. The time to plan for your child’s college education is as soon as your child is born. However, if you haven’t done that (and believe me, you’re not alone!), it’s never too late to start.
Even if your child will head to college in a couple of years, United Financial financial advisors can help you get started saving for it today. Contact us to set up an appointment. Don’t waste time worrying about funding a college education. It’s time to do it!
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