It’s reported that 85% of students receive financial aid to offset the cost of tuition. This may include loans, grants, scholarships, and more. However, parents need to focus on the best college-saving strategies, working to prepare for their child’s continued education.
The type of college a student attends plays a large role in how much they’ll spend on their education. A private college, for example, could be as much as 75% more expensive than a public one. However, the school your child attends depends largely on their area of study and which school can help them achieve their career goals.
This means that parents should prepare for their child’s education as early as possible. There are various ways parents can save, but which savings plan is best?
Let’s take a look at different college-saving strategies.
Focus on a Dollar Amount
Before figuring out the best way to save money, it’s important to consider a dollar amount. A general rule of thumb is to save at least 50% of your child’s complete college tuition.
If you start saving when your child is young, it’s difficult to predict where they’ll go to school. But you can base your savings plan on the average tuition cost in your state or even in the country if you plan on moving.
You can create a monthly savings plan that works for you, your family, and your budget, investing so you see a return when your child is college-bound.
Although many parents choose to invest their child’s college funds in a 529 account (more on that to follow), not everyone does. There are certain drawbacks to a 529, and some parents may opt to invest in some type of low-cost brokerage account.
However, you’ll need to decide if you should conservatively or moderately invest. It all depends on when you start saving for your child’s future. If you start earlier, you may benefit from a more aggressive account that wields a higher return. A few years before you’re ready to access this money, you’ll want to reduce your account to a more conservative one.
Consider that, annually, the stock market has an average rate of return equal to 10%. If you save $10,000 a year for 15 years you’ll have roughly $350,000 in your account. If you start saving as soon as your child is born, you can scale back to a more conservative account by the time your child is a sophomore in high school.
What’s nice about investing in the stock market is that you can use this money for anything. This means that, should your child get a scholarship, this money is available to fund their future in other ways — their first house, first car, wedding, and so forth.
Keep in mind that there is a risk associated with investing in stocks, and you have to pay long-term capital gains taxes.
A 529 savings account has its benefits. However, you’ll also encounter some drawbacks.
For starters, 529 accounts offer limited investment opportunities. You may find that the type of 529 plan you choose — and your state — restricts where you can invest.
On the other hand, there are tax benefits with this kind of account. No, you can’t use your 529 plan for any income tax deductions, but you can grow these accounts federal tax-free. Additionally, when you withdraw funds from this type of account, you’re not taxed.
If your child receives a scholarship or decides against going to college, then your 529 plan will cost you. Should you cash it out for anything besides your child’s tuition or other college-related expenses, you’ll have to pay federal income tax on the money plus an additional 10% penalty on any money you have earned. This can make a 529 plan offputting for parents.
It’s also possible that a 529 plan will count against your child’s ability to receive student aid, so always speak with a qualified professional if you’re unsure about the best way to save.
According to T. Rowe Price, if possible, save $250 a month starting when your child is born. However, this isn’t always feasible for everyone.
Even if you don’t have $250 to save every month, make saving habitual. No matter how much or how little, put money aside regularly. For birthdays, holidays, and other milestones, consider asking family and friends for contributions to your child’s college fund.
It’s also important to consider your finances when creating a savings plan. When your child is young, daycare can be expensive. The average cost of childcare is anywhere from $5,000 to $17,000 yearly.
As your child becomes school-age and transitions out of daycare, your monthly childcare expenses should be reduced. From there, you can add more money to your child’s college savings account.
It’s a good idea to sit with a financial planner yearly, discussing your investments and what you can change. If you’re unsure about how to find a financial planner, start with your local bank. They usually have a financial planning department ready to help you with your college savings goals.
When saving for college, remember that a parent’s assets and a student’s assets are different. When utilizing 529 plans, understand that this type of account is considered an asset of the owner. It’s not the asset of the student beneficiary.
Additionally, a student’s assets and income can affect their Expected Family Income (EFC), soon to be the Student Aid Index (SAI). Before beginning the FAFSA process, parents should transfer assets from the student’s name into the parent’s name.
It’s also important to factor in student income allowance, as it’s protected income. Asset protection allowance isn’t considered when determining your child’s financial aid. This means that students and parents can have assets that aren’t used for educational expenses.
Additionally, these assets may be eligible for EFC/SAI calculator exclusion. The result is more federal financial aid being awarded, along with additional grants and scholarships.
Start Planning Today
It doesn’t matter if you open up a low-cost brokerage account, a 529 savings account, or some other form of savings account — it’s important to start saving for your child’s education. If you can’t save the recommended $250 a month (if not more), that’s okay, too. The goal is to save what you can, when you can. Every bit helps.
If you have questions about the college application process, how to save, and what your child needs to do to prepare for continuing education, we can help. College Funding Professionals has the knowledge and experience to guide you every step of the way.