How Do You Plan to Save for Your Child’s College?
Savings are a great way to ensure that your future remains stable and secure. When we talk about future savings, we often neglect planning for a very important event, i.e. college. With the increasing debt of student loans, planning for education funds is an important part of today’s economy. But surprisingly, according to a survey, only 50-60% of parents actually attempt to save for their child’s education. Failing or neglecting to save for higher education is not only a burden for parents, but also for young graduates, who face a financial crisis as soon as they leave college.
Although saving for college may seem intimidating, a simple solution to the problem is to plan and save from an early stage. Here are a few steps that you may follow to initiate an effective planning process for meeting higher education costs.
Balance Retirement and College Savings
Many people often prioritize their children’s futures above their retirement plans. Going by past trends, this rarely turns out to be a good move in the long run. You must remember that even while in school, your child will have other aids to bank upon. For example, work-study programs, student loans, and scholarships. Conversely, your entire life post-retirement entirely depends on the savings that you have. Hence, you should concentrate on saving for your retirement first. When you are financially secure yourself, you feel empowered to further save for your children’s college funds. Here are a few small strategies that can help:
- Go all-in by funding your retirement plan to get a full employer match. You will get great benefits of 401 (k) and IRA contributions, if you invest wisely.
- Try increasing your retirement savings through income elevations. Always try to divert the extra cash towards a retirement plan. You may include appraisals, incentives, or bonuses in this category.
- Start a dedicated bank account for college funds. Put all leftover cash in that account. Try your best to put aside some amount every month.
Choose a 529 College Savings Plan
Continued periodic savings in a dedicated account can have a big impact on the future of your child. Many people find the expert-recommended 529 college savings plan quite effective. The 529 plan offers growth and withdrawals that are exempted from tax. It also provides a great medium for liquid education expenses. This plan is a brilliant option for parents because it offers significant planning advantages along with beneficiary flexibility. In addition to this, the tax-free growth comes with the added advantage of tax-free income when used for qualified higher education expenses.
A 529 plan, in essence, is an all-inclusive plan that covers varied costs like tuition fees, books, computers, or any other special education expense. For parents with two or more children, you also have the upper hand of changing the beneficiary without an increase in income tax, in case the earlier beneficiary refuses to go to any college. Certain 529 plans even offer state income tax deductions for those contributing to the in-state plan.
Consider a Roth IRA Account
A Roth IRA is a great savings tool for people who are trying to secure long term retirement savings. A Roth IRA is a tax-free, flexible plan, the earnings from which can be used for various things. As an investor, you can’t take out your earnings without penalty until the age of 59, but certain exemptions allow you to withdraw early. For instance, if the account is under operation for 5 years, the contributions can be withdrawn without penalty to pay for a child’s education.
A major drawback of this plan, however, remains that it does not allow for annual contributions above $6,000. Also, the withdrawals made from the plan will be considered as an income when your child tries to apply for financial aid. This may reduce the child’s ability to be eligible for the Free Application for Federal Student Aid or FAFSA in the future. Nonetheless, it remains a popular choice for parents. For those interested in leveraging this option, keep in mind to open a Roth IRA account at least 5 years before your child’s first year of college.
Involve Your Child in the Education Expenses
It is a good idea to include your children in your plans. This will help you understand their future aspirations and needs, and also make give them a sense of responsibility in regard to their education. A good way to take the giant leap is to start discussing savings and financial affordability plans with your kids. Here’s how you can get started:
- Prepare the FAFSA application and try applying at an early stage to keep things in order. This helps in qualifying for financial aid in different colleges, although rules may vary by state. Discuss the possibility of attending community college for the first couple of years, with your child. An initial low-cost education helps build savings for better education in a reputed university later.
- Consider funding only a part of your child’s education. Some students are able to contribute for as much as 50% of their education by doing part-time jobs. There is no harm in bringing your child to the financial arena for their own benefit.
- If your child has a talent, aiming to get an athletic or academic scholarship is another great idea. This can substantially reduce the burden of college expenses.
To Sum it Up
Saving for college is an important economic aspect that shapes your child’s future. Try to save up as much as you can, so you are not burdened with student loans later. The cost of education is growing year by year. Hence, the earlier you start planning, the better chance you have at witnessing the success of your future generation.
Do you think that your child’s college savings are on the right track? It might be a good idea to take the help of a professional. Consult financial advisors and get assistance on how to start saving for college.