When raising kids, one of the biggest expenses that you would have to prepare for as a parent is their college education. With costs rising on a yearly basis, you might feel overwhelmed by simply thinking about how much you’d have to spend later on.
This is especially true once you consider the other expenses that you have like your retirement fund, credit card bills, mortgage, monthly household expenses, etc. When you think about all these things, don’t panic. Remember that preparation is key if you would like to have the funds for your child’s college education. The earlier you start saving, the better.
Read on to find out more about how you can save for your child’s education, and why the investment is well worth it in the end.
In this guide...
Higher Education: Is the Investment Worth It?
According to financial company Merrill Edge, the expense associated with sending kids to college is well worth it in the end. In 2012, the unemployment rate based on educational attainment is as follows:
- Doctoral Degree – 2.5%
- Professional Degree – 2.1%
- Master’s Degree – 3.5%
- Bachelor’s Degree – 4.5%
- Associate Degree – 6.2%
- Some College, No Degree – 7.7%
- High School Diploma – 8.3%
- Less than High School Diploma – 12.4%
These figures are from the May 2013 population survey of the Bureau of Labor Statistics. As you can see, the higher the educational attainment, the lower the unemployment rate. If your kid did not even finish high school, there’s a very big chance that he or she will be unemployed. For those who do manage to get employed, the chances of career growth or having a decent salary are not that high.
This is precisely the reason why parents should exert the extra effort in making sure that their kids get the college education that they deserve. If you’d like your child to have a secure future, you should start saving up for a college fund as early as possible.
Take the First Step: Setting Up Realistic Expectations
When you go online, you can use several tools to calculate how much you would have to save each month for your child’s college education. It all depends on how old your child is today, how much you are earning on a monthly basis, and which field of study it is that your kid wishes to pursue. Some of the websites that you can use for this purpose are:
After making some rough calculations, you can adjust your monthly budget in such a way that you can save enough for your child’s future college education.
Ways to Save for Your Child’s Education
Next, what are the specific ways that you can save money for your child’s education? Take a look at the following list:
Look for items in your monthly budget where you can save money on a long-term basis
Let’s say that you are a single mom who is already on a tight monthly budget. Exactly where can you find the extra funds to save for your son’s college education? Make a detailed list of your monthly expenses.
If you frequently buy a $5 latte from the coffee chain near your office before you go to work, how about having brewed coffee at home instead? You can even use a travel mug and bring your own beverage to work, or simply have coffee in the office. This will easily save you $100 per month, or $1,200 per year. That’s a huge savings when you cross off just one item from your budget!
If there are plenty of other unnecessary expenses that you can eliminate and instead use to invest on your son’s college education, all the better.
Consider investing in 529 college savings plans
One of the most common solutions that parents use to save up for their kids’ college education is investing in 529 accounts. These are investment accounts that grow on a tax-free basis. As long as the money is used for higher education, the federal government will not charge you taxes for it. Whether you’re an average earner or if you are earning a higher salary than usual, you can contribute any amount to a 529 college savings plan.
Just make sure to determine what the rules are in your state, because there is a maximum lifetime contribution. The figure ranges from $235,000 to $300,000. What’s good about investing in 529 college savings plans is that you can start even with a mere $25 and once your child is ready to enroll, you can use the money at any college or university in the country which are accredited.
How about prepaid tuition plans?
If you already have the funds today to pay for four years’ worth of your child’s education, you can do so with prepaid tuition plans. If you put the money on a safe savings account, the interest will be very small – and you need to take into account the inflation rates if there are still four more years before your child can actually go to college.
Using a prepaid tuition plan, you can pay the full amount of your child’s college education or even a portion of it, but with today’s rates still applicable. Again, the amount varies on a state-to-state basis. If your child decides to go to college out of state, you can simply pay the difference – but the rate that is on-going will still apply instead of what it will be four years from now.
Learn about Coverdell ESAs
ESA stands for Education Savings Accounts. It works pretty much like an IRA or an Individual Retirement Account – only the funds are specifically meant to be used for college education. You can make a contribution of up to a couple of thousand dollars per year, the money grows on a tax-free basis, and there is no tax applied to the withdrawal – be it for the main contribution or the interest. That is, as long as the money is used for educational purposes.
Set up a custodial account for your child
Yet another option to save for your child’s college education is to setup a custodial account. This is a savings account placed in your kid’s name – only you as a parent have control over it. You do gain control of the custodian account until your child reaches legal age.
As the custodian, you get to decide how the money is invested, how the earnings are invested again, and when to take the money out to spend for the education of your child. There’s a specific non-taxable amount – anything beyond that is subject to around 15% tax.
Go for traditional IRA and Roth IRA accounts
IRA stands for Individual Retirement Account, and it is a kind of investment account that lets you save money for either retirement or your kid’s college. Just because you are investing on your child’s college education does not mean that you should forget about your own retirement. Retirement is, in fact, more important than college education. However, if you can juggle both expenses at the same time, that is the best solution all the way round.
If you are thinking about using IRA for your child’s college education, you can go for the traditional IRA or the Roth IRA account. A Roth IRA account is not tax-deductible, but you can withdraw money contributed at any time without penalties or taxes. There are also deductible and non-deductible IRAs that you can use for your child’s college tuition.
Learn more about which of these types of IRA are best used for your child’s college education by doing your research so that you can make an informed decision.
Things to Look for in Education Funds
When deciding which among these savings funds you should use to save for your child’s college education, there are a few things that you need to consider. Take a look at a few questions that you may want to ask:
- What kinds of fees will I be charged with once I take advantage of a specific college education savings plan?
- How much do I need to invest and how often should I contribute?
- Aside from parents, who else can contribute to my child’s college savings account?
- Which investment options are available, and what is the time frame that these options can meet my child’s educational needs?
- Once the funds are already there, can the money be used for tuition only? Or are board, clothing, gadgets and other educational expenses included?
- What are the requirements before the funds can be accessed?
- What are the tax-related Terms and Conditions that I should be aware of?
- If I can no longer contribute to the fund, what happens to the account?
After taking all these things into consideration, the final step that you need to take is talk to your kids about their college education options. After all, it’s their education that you are saving up for – so they should be aware that such funds do exist. If you’re lucky, they might even volunteer to contribute to the college savings fund, making it easier for you to manage the expenses once they’re heading off to the college or university of choice.