Even if you earn an above-average salary, there’s no shortage of living expenses to contend with; from a mortgage and auto loan, to utilities and insurance, to putting food on the table. As a parent, you also have expenses associated with keeping your children healthy and happy.
These factors can make it difficult to figure out a budget that allows you to accumulate wealth and plan for retirement, much less start socking money away for your child’s college education. Right now, you might be asking yourself, “Isn’t that a problem to think about down the road?” Not unless you’re planning to rely on massive student loans.
According to U.S. News & World Report, the cost of college tuition is on the rise. For the 2018-19 school year, tuition and fees went up by nearly 2% at in-state schools, almost 1% for out-of-state admissions, and 3% at private colleges, with annual costs averaging out to:
– $9,716 in-state
– $21,629 out-of-state
– $35,676 private
These increases track for year-over-year cost bumps, and they don’t even factor in other essential expenses like books, housing, and food. By the time your kids reach college age, you could be looking at significantly higher costs.
In truth, the best way to save for your child’s future college expenses is to start as soon as possible. With financial planning and investment management advice and assistance from qualified professionals, you have the best opportunity to send your kids to the college of their choice and help them avoid crippling student loan debt. There are several ways to go about maximizing the money you put in.
1. Take education seriously.
Planning for college means devising a savings and investment strategy that helps you to save for anticipated expenses, but it also means finding the best ways to reduce costs. Starting early is a must when it comes setting up suitable college funds.
The next step is ensuring that your children take their own education as seriously as you do. When your kids study hard, keep up with homework, and maintain a high GPA, they have the best chances to get into their school of choice. Taking AP coursework and acing college prep tests like the PSAT, SAT, and ACT can also help, as can exploring outside interests and pursuing community service opportunities that help to enhance their college applications.
All of this can not only ensure admission at top schools, but also infer monetary benefits like scholarships. For example, juniors that take the PSAT have the chance to qualify for the National Merit Scholarship Program, based on their abilities, skills, and accomplishments. Winners could get a $2,500 National Merit Scholarship, corporate sponsored scholarships (renewable up to four years), or college-sponsored scholarships (renewable up to four years).
That’s just the tip of the iceberg where scholarships are concerned, and there are myriad opportunities to earn scholarships for academics, testing, participating in a variety of activities (sports, music programs, etc.), and writing in to essay contests. This can all help to reduce costs for students who are driven and committed to reaching educational goals.
If you’re wary of investing, there are plenty of low-risk ways to increase the nest egg you set aside for college. Certificates of Deposit(CDs) are an easy option that you can set up at your local bank. You put money in for terms of anywhere from a month to 10 years, with longer durations generally offering higher interest rates.
Rates vary depending on a number of factors, but you can generally expect to earn interest ranging from under 1% up to about 3%, or possibly a bit more. If you remove money before the maturity date, you will face penalties, so plan wisely. This is more than you’ll earn with the average savings account, but less than you could earn with other options.
3. Prepaid Tuition.
There are two types of 529 plans: prepaid tuition plans and education savings plans. Also known as a qualified tuition plan, a 529 plan is a tax-advantaged account specifically for college savings, authorized by section 529 of the Internal Revenue Code.
The prepaid tuition plan allows you to prepay for tuition and mandatory fees, or ostensibly purchase college credits, at the current rate. So, if you buy six credits at a rate of $3,000 and the price jumps up to $5,000 by the time your child starts school, you’ll essentially get $2,000 worth of college credits free. There are limits and not all states guarantee programs, so if the program you pay into goes under, you could lose a portion or all of your money.
These plans are sponsored by state governments, state agencies, or educational institutions and are available in all 50 states and the District of Columbia. You just need to do your homework to make sure you find a plan that is guaranteed by the state government, since the federal government will not guarantee such plans.
4. Education Savings Plan.
529 education savings plans offer better control than prepaid tuition plans since they allow you to open an investment account like a mutual fund, ETF, or principal-protected bank product, for example, under a beneficiary’s name (your child). Money can only be withdrawn for qualifying education expenses, but these funds can cover room and board while your child is in college, in addition to tuition and fees.
Some principal-protected bank products are FDIC insured, while some other plans are guaranteed by state governments. You’ll have to do some research to find the best options in your state. It’s also important to understand fees and expenses of different 529 plans going in to make sure you’re earning the greatest returns on your investment.
5. Coverdell Education Savings Account (ESA).
These are similar to 529 education savings plans, except that they can also be used for K-12 private school tuition. The major benefit of the Coverdell ESA is the tax advantage, whereby earnings on contributions are not taxed upon withdrawal. The downside is you can only contribute a total of $2,000 per year per child under the age of 18 (regardless of how many ESAs you create).
The Uniform Transition to Minors Act and Uniform Gift to Minors Act allow you to essentially create a trust in a minor’s name that you can irrevocably transfer money into and control as the custodian/trustee until the minor reaches the age of adulthood (18 for UGMA or 21 for UTMA). The upside is that the money is not considered part of your estate and cannot be claimed by creditors, for example.
However, this type of account infers no tax advantage, and because it is in your child’s name, it can count against students applying for financial aid. In addition, you have no control over how the money is spent once it transfers to your child upon adulthood, and as a trustee, you must act as a fiduciary, managing funds in keeping with the best interests of the beneficiary (your child). Unless you fear losing the money to personal or business creditors, a different type of account may better suit your needs when it comes to college planning.
There are many options to explore when you decide to invest in your child’s future by setting up college savings or investment plans. Your best bet is to work with reputable and reliable financial planning and investment management professionals to find the plans that are right for you.