While the idea of planning to save for your child’s college education can be challenging, the escalating costs and shocking student loan statistics make this process even more complex. The US student loan debt that is exceeding $1.7 trillion is one of the main reasons people are so keen to provide their kids with a debt-free start. The good news is that it’s never too late — or too early — to start saving.
Every stage of your child’s growth period requires building a college nest egg; it’s the best practice. Indeed, the secret lays in the fact that deciding to do something regardless of the amount, is the most important thing.
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Why Earlier Saving is More Important Than One Might Expect
The earier you start to save, makes compound interest, the magic of financial planning your best friend. Cheap contributions are magical in the sense that they become a significant college fund over a period, if only you let them serve.
The truth is, it has been found by studies that around 70% of parents expressed their intention to cover approximately 70% of the college costs of their kid, but only 30% of them are on track. The main thing? Many parents do not know where or how to start. But one does not need to be a financial specialist to do a sound plan that works.
How Much Should You Be Saving?
College costs are escalating. Presently, when you take into account tuition, fees, room, and board, the expense for a four-year in-state public college is about $88,720. However, for out-of-state or private colleges, this amount can be between $150,000 and $200,000. Adding to those, these figures are going to increase by around 1-2% annually due to inflation.
“If that feels impossible to you, financial experts recommend the “one-third rule”:”
- One-third of the cost comes from savings (past income)
- One-third from current income when your child is in college
- One-third from future income, like loans or scholarships
It is not necessary to make the entire sum at once in order to start savings. But the goal of one-third may be a win-win decision for you.
Best Options for Building a College Fund
If you are among the most parents, then these are the most parent-friendly ways to start the saving.
1. 529 College Savings Plans
529 plans are the best and the most effective methods of saving. You can invest in those accounts with the money that has already been taxed or with your after-tax money, and your capital would not have to be tax paid off as long as the investments are used for qualified education expenses. Many states also offer tax benefits for the contributions. 529 plans can pay for tuition, books, room and board, and also for the technology like laptops.
2. Prepaid Tuition Plans
Some states allow you to freeze the tuition fees of today, so you will not face future price increases. Such plans are inflexible but they can successfully act as a protection from the inflation if you are fully convinced that your kid is going to be educated at the local school.
3. Roth IRA
A Roth IRA, in general, is a pension account but can be utilized as an alternative college savings tool as well. The purpose of taking out the money from the accounts for college is that the ‘penalty-free’ term has been taken off. Or else you may save it for your retirement.
4. UGMA/UTMA Accounts
Managed investment accounts for offspring are a form of parenting that allows you to save and invest on your child’s behalf. The funds can be used for any expenditure that benefits the child — not only education. Nonetheless, they can decrease a student’s financial aid because the funds are legally owned by the child when they turn 18 years old.
5. Coverdell ESA (Education Savings Account)
Most people are not familiar with this account, which offers tax-free growth for school fees, including K-12 private schools. Thus, the yearly maximum is quite low, about only $2,000, in comparison with 529 plans.
Scholarships, Grants, and Financial Aid
Remind your child that they don’t need to do it alone. More than $24 billion in scholarship and grant money is available every year. Encourage your child to be more active in the scholarship department — every unsuccessful application still adds up. Financial aid is also likely to be a part of the picture if you diversify your savings plan strategically.
Bonus Tip: Work With a Financial Adviser
Parents who use a money expert along with them contribute, on the average, $14,000 more to their children’s education than those who go alone. Such professionals can guide you to find the right saving mechanisms, identify tax breaks, and prepare for cost increases or unplanned events.
No matter the size of your start, the action taken now can significantly lower the financial stress of the future for both you and the child. Just $50 or $100 a month can be a lot in a decade when they complete high school.
Whether you are starting your first 529 account or reassessing your household budget, the most illustrious role you can have is to start now. The future You (and your child) will be super grateful.
