Many people associate financing a college education with a complex web of savings strategies. Saving for college can be particularly tricky because each family has its own set of financial priorities and trade-offs. Are your children planning on attending a public or private school? Are they looking for a four-year or two-year college?
Regardless of your individual circumstance, there are a few basic things to know as you prepare for one of your family’s most substantial expenditures.
The Rules of Saving Made Simple
Saving for college is easy if you start early on.
Financial experts agree that a consistent savings strategy can help you set manageable goals and follow them through. For example, if you want a simple, catchall formula to figure out how much you should save, there’s one rule of thumb you can follow. Multiply your child’s age by $2,000 and you’ll get a rough estimate of how much you should have saved to date.
Using a 529 Plan
A 529 plan is a popular way to save for your child’s college education. This state-sponsored plan gives you access to a tax-free investment fund that you can use for costs related to education, including tuition, books and room and board. There are various ways to manage the money you put into a 529 — especially if your child is entering high school – so be sure to research how to do so most efficiently.
Saving money in a 529 plan offers a way to put cash away for college while simultaneously saving on taxes. However, if your child is entering high school soon, you should double-check the allocation of your investments. Particularly if all or the bulk of your child’s college savings is invested in a 529 plan – a general rule of thumb is to shift your investments into more conservative allocations as college nears.
Funds in state-sponsored 529 accounts are usually invested in mutual funds and grow tax-free. When you take the money out, funds aren’t taxed if the money is spent on eligible education costs. The total investment in 529 plans reached $253 billion in 2015 alone based on data from the College Savings Plans Network – clearly 529 plans are a popular college savings solution.
Save a Quarter, Spend a Quarter
Saving for college is not a huge burden and dividing savings into categories makes it easier to conquer. This can be especially effective if your family is on a leaner budget and won’t be able to afford the entire cost of your child’s education. This four-step plan is a combination of saving a quarter of the cost over a child’s first 18 years and paying another quarter out of current income over the following four years while the child is in school. The rest can be borrowed and divided between the parents and the student.
Although the future of student loans is generally uncertain, parents can adopt a more aggressive way to pay for a quarter of college: Draw on home equity now while you can, put the money in certificates of deposit and use your (often tax-deductible) interest payments on the loan as if it were an insurance policy, where you’re paying a “premium” just to be sure you’ll have access to the capital.
What to Do if You Haven’t Saved at All
Sometimes, your individual situation can make it difficult to save for college, but you should know that you are not alone. Even people with little to no savings can manage to save for college. Loans, financial aid packages, merit awards and gap years can all be suitable alternatives to offset the high cost of higher education.
There are several options worth exploring, including federal aid, a possible gap year and available scholarships. Although the federal government will lend you whatever you need to pay for college costs if you pass a basic credit check, this type of financial help is a bit tricky to obtain. Your decision to borrow, however, should be based on how many children you have, how much money you’ll need to retire and how long you can keep working, among other factors. Surepath Wealth financial advisors in Austin TX can help with great advice.