Repost from We the Savers: http://wethesavers.com/save-for-college/
Save for higher learning: give it the old college try.
For some of us, the mere thought of sending a child, grandchild, niece or nephew off to college may conjure images of sprawling campuses, dorm parties and Saturday football games (Go State!). Then there’s the rest of us: the ones still in college tuition sticker shock.
College memories are nice, but they won’t help when it comes to paying for school in the present. After all, the cost of attending a public college is growing at a whopping rate of 6.5% a year – and private institutions (5.7%) aren’t much better. It’s estimated that in 10 years or so, a four-year education can top out at over $275,000.
Uh, yikes.
Sure, saving up for college is a daunting prospect – but with the right amount of planning and action, finding a way to finance it (in part or in full) without going broke is definitely within reach. Here are a bunch of “Savings 101” idea starters to help you get your future college grad on the launching pad.
Start in the baby years
When time (and compound interest) is on your side, saving for college is filled with promise.
A popular go-to savings strategy for many young parents today is the Gerber® Life College Plan, which offers the earning potential and security of a traditional savings account while rewarding parents for not touching the money over the long haul. Want your spending money to turn into college savings? Then Upromise® may be a nice option. Upromise partners with thousands of vendors nationwide to offer college cash-back bucks for all kinds of everyday eligible purchases (those diapers alone can really add up, you know).
If slow and steady still wins the race, then US Savings Bonds are a pretty good head start (especially when they come courtesy of the little bundle’s great Aunt Pearl or Grandma and Grandpa). And remember, for the ultimate in flexibility, there’s always your trusty personal savings account – why, automatically investing even $25 a week for 18 years can really add up on its own. Just set up a sub-savings account designated just for college savings and consider it hands-off.
Saving’s elementary – even if it starts in elementary school
OK, so building up that college stack isn’t always top of mind for new parents. Fret not, there are still plenty of good ways to play catch up as your little one moves through the pre-school, kindergarten and elementary school years (and beyond).
State-sponsored 529 College Savings Plans are super popular and flexible. First, you don’t necessarily have to pick the 529 from your home state (do some digging). And second, you can choose whether to invest your contributions in a pre-paid tuition plan or a college savings plan.
The 529 pre-paid plan essentially locks in tomorrow’s tuition at today’s prices, ensuring that at least part of your kid’s future tuition will be paid. You either make a lump-sum purchase or pay monthly installments toward the tuition. The program then pools the cash and invests it so the earnings will meet or exceed future tuition increases. The caveat is that this tuition can only be used toward institutions that participate in the program (and also includes private and out-of-state colleges).
On the other hand, the 529 savings plans are made up of stock and bond funds that usually consist of age-based portfolios, similar to 401(k) plans, and you can use the funds at any college you choose. You can invest as little as $25 a month, and the lifetime cap usually tops off at $270,000. The plans are flexible and you can change your investment choices whenever you want.
The best part? Either way, earnings aren’t taxed – and some states even offer tax breaks on top of the federal tax treatment (hello, double tax benefit). What else? Both allow the beneficiary to change to another family member, which comes in handy if Junior doesn’t want to go to college, but his little sister has her sights set on Harvard. And one of the biggest draws is that as long as the money saved isn’t under the student’s name, it won’t be counted when it comes to determining financial aid (more on that later). But heads up, if you don’t use the 529 plan for college expenses, you’ll likely have to pay a 10% penalty and income tax on the earnings when you withdraw the money.
A Coverdell Education Savings Account (ESA) – formerly known as the Education IRA – is yet another great way to contribute slowly but surely to the college fund. Somewhat like a 529, an ESA is an investment-based, tax-saving way to save for future educational expenses. But there are some key differences.
ESAs max out at $2,000 a year, and adjusted gross income has to be less than $110,000 if you’re single, $220,000 if you’re married and filing jointly. This can make it less appealing for mid- to high-income parents, or those who want to squirrel away more money than the max allows. But like the 529, assets are considered parental and not the student’s, which helps when it comes to financial aid. Plus, while 529s require you to invest in what the plan sponsor offers, ESAs let you invest in the full gamut of mutual funds, ETFs and individual stocks.
Hightailing it out of high school
When time isn’t on your side and the stark reality of impending college costs hits hard, take a deep breath and remember there are other options. Let’s start with scholarships. There are a ton of them out there – do some online homework with your high schooler some Saturday morning and find one that looks promising. Most granted by the college itself are either merit-based (academic or athletic achievement) or take into account your family’s financial need.
And don’t forget, there are tons of other opportunities granted by non-academic organizations, from one-time cash awards to 4-year rides. The U.S. Department of Labor has a nifty free scholarship tool, you can use to search thousands of scholarship and fellowship opportunities. It’s a bit of work on your part, but it’s time well spent.
Another way to trim college costs is to stay in state. Resident tuition and fees for in-state residents averaged just $8,539 for the 2013-2014 school year. Compare that with an average of $19,465 for out-of-state students and nearly $30,500 for private colleges, and it’s clear that staying close to home can really pay off financially. Generally, to qualify for in-state tuition, at least one parent must have lived in that state for more than a year.
And of course, there’s the financial aid route, which is determined solely by a student’s demonstrated financial need. There are 3 categories:
- Grants(that don’t have to be repaid)
- Work study (your young student gets a real job, hopefully in their field of study)
- Private or federal student loans (that have to be repaid)
The Free Application for Federal Student Aid (FAFSA) is the most common document that colleges use to figure out how much financial aid a student can get. Be prepared for a long application, and know that the FAFSA formula assumes that students should spend 20% of their assets on college – but for parents, the rate maxes out at 5.64%. And don’t forget student loans (contrary to popular opinion, a little scholarly debt isn’t always a bad thing). In fact, they’re often a viable, much-needed option for many families and students who haven’t saved enough or just don’t make enough. Just do your homework, look for the best rates and payment schedules out there, and figure out how much debt you and/or your child is willing to take on for a brighter future.
Bottom line? A 4-year education at your kid’s first-choice school is great, but it takes a ton of financial planning on your part (not to mention hard work, good grades and some shared responsibility on theirs) to make it happen. But you’re a Saver – we know you can do it.
What about you, Saver? How are you gearing up for your kids’ college career? And what other tips and tricks can you offer up?
Financial Freedom 4 College 