As parents prepare to send their kids to college and fill out their FAFSA, many find themselves wishing they had begun savings plans for college sooner. There is no doubt that higher education is expensive, but a little forethought and planning help more than you would imagine. Here is what you need to know about starting a savings plan to give your kids a financial boost as they enter college.
How Much Do You Need to Save for College?
According to the latest statistics, Americans carry more than $1.71 trillion student loan debt shared between 44.7 million people. In order to go to college, 69% of students needed loans. An additional 14% of parents also took out loans to pay tuition fees. There is no doubt that the cost of education is higher than ever.
However, how do you know how much to save for your child’s education? To give you a general idea, the Class of 2019 graduated with an average of $29,900 of debt. This includes both federal and private debt.
In truth, there is no exact figure since tuition varies between schools and will likely continue to rise. The best advice for parents saving for college is that the sooner you start, the more time you have to accrue interest and grow your children’s college fund.
What Are the Best Funds for Minors?
When it comes to setting up accounts for minors, there are limited options. Since minors don’t have the right to contract, they can’t own investments in annuities, stock, bonds, mutual funds, or life insurance policies. But, you can start funds naming them beneficiaries. As you contribute to their accounts, you can also show them how to save and invest. If you teach your children the basics, then they can be more involved in their savings plan for college. Moreover, they can contribute to it themselves if they get a job. The more people contributing to the account, the faster it will grow.
UTMA and UGMA
Although UTMA and UGMA accounts are not specifically designated as an education savings account, they can be used to pay educational expenses. The accounts are opened in the name of the child. But, the adult must act as custodian until the age of majority. When the beneficiary reaches the age of majority, the funds must be turned over to the beneficiary.
Many parents choose these accounts because they protect the assets until the child comes of age. Additionally, the fund continues to grow tax-free until the account is accessed. However, once the funds are distributed, the money can be used for anything. Furthermore, it counts against students applying for financial aid since it is considered the child’s asset. If you want the account to be specifically for education, there are other options to consider.
529 Plan
Many parents prefer the 529 Plan since it requires that all funds must be used towards higher education. Since it is more specifically designated, you can ensure that the money is being used as intended. The 529 Plan varies from state to state, but in general you can contribute and earn much more than with other education savings accounts. Furthermore, you can choose how you invest.
One of the greatest advantages for the student is that the account is considered a parental asset. Therefore, it does not act against their FAFSA. The account will also continue with the tax deferred status until the funds are withdrawn. Just be aware that some states enact changes based on age or freeze options. If you are uncertain about your state’s laws, contact your financial advisors to discuss how it works where you are.
Education Savings Account (ESA)
An ESA (Education Savings Account) allows you to contribute up to $2,000 per year for every child. This money grows tax-free, but you cannot exceed this annual limit. This severely restricts potential growth. But, you will still have a much better rate of return than with a traditional savings account.
While some parents like the limitations on how the money can be spent, others feel it is too restrictive. With the contribution thresholds and age limits, few people turn to these accounts when saving for college.
How Can You Reduce the Cost of College?
1. Apply for different scholarships.
While only a lucky few have their educational expenses completely covered, there are ways to reduce the cost of college. The easiest way is to apply for scholarships. Although the most common scholarships are awarded for academics and athletics, there are tons more out there. Although they may not be full-ride, you can search through a variety of scholarships at fastweb.com. You can apply for as many as apply to your child. Even if they seem small, remember that every penny counts when it comes to you savings plans for college.
2. Find a Job.
Another option is to apply for work study assistance programs or a part time job. The extra income can offset your remaining tuition balance.
3. Create a college budget.
If you are living on a limited income, then you need to get used to living on a budget. Controlling your spending habits and using money wisely are important life lessons. If they can learn how to save when they are young, then they won’t graduate with even more debt due to irresponsible spending.
4. Take AP courses in high school.
If you child is a high achiever, you should look into AP courses offered through their high school. Although these courses are designed for high school students, they can earn college credits if they pass the exams. Not only does it eliminate college course requirements, but also the fees associated with them.
5. Consider all educational options.
The cost of a degree is expensive and continues to rise every year. If your child is uncertain of their field of study, you should consider junior colleges until they declare a major. The courses are often much more affordable. Furthermore, they give your child time to complete their General Education Requirements while they figure out their career path.
However, a diploma from a four-year university is not always required to get a good job. You may want to consider trade schools if your child wants to pursue a specific skill or job field. A traditional degree is not the right answer for everyone, so you should consider all your educational options when you start your savings plans for college.
6. Consider using savings apps.
There are a lot of savings apps out there and we have listed a few. Check out this table as reference.
| App | Fess and minimum: | Best for: |
|---|---|---|
| Digit | 30-day free trial period. $5 per month | Setting aside automatically |
| Acorns | $1 per month | Spare change investing. |
| Qapital | $3 membership | Letting you set rules to automate savings. |