Providing your kids a college education is a top priority for many parents. There’s just one problem: College is enormously expensive and becoming more so, year after year.
Cost of College is Up
Over the past decade, tuition costs increased 45%, according to the government-funded Education Data Initiative. Considering the average cost of room and board, books and supplies, lost income, and other expenses, the total cost of a 4-yr degree costs anywhere from $156,162 for a public education and $335,040 for private.
Yet, the average amount saved by the 54% of parents who have planned for their child’s education, is just $28,389. Consequently, most students graduate with significant debt.
The good news is that with informed financial planning parents can find ways to save more and thereby reduce or even eliminate the need for their children to incur crippling student loan debt. With that in mind, let’s take a look at seven effective ways to finance a college education.
7 TIPS TO SAVE FOR COLLEGE
1. Get Your Personal Financial House in Order Before You Start Kids’ College Fund
First things first: if you don’t have the money to pay your own bills, it’s unrealistic to think about funding your children’s education. Before saving for college for your kids, you may need to start planning your retirement, paying off high-interest loans, and setting aside enough money to cover unexpected expenses like home or car repairs.
2. Consider 529 Plans
For most families, the bulk of college savings are held in 529 plans, which are specialized accounts that work similarly to a Roth IRA: you fund it with post-tax dollars, and you don’t have to pay taxes on the money you withdraw. The one caveat is that you must use 529 funds on qualified educational expenses like tuition, books, room, and board.
In the past, you may have incurred penalties for not using your 529 plan to cover qualified education expenses—but thanks to the Secure Act 2.0, you can now roll over some of the unused funds into a Roth IRA or change the beneficiary on the account, if necessary.
Ideally, your 529 account investments will grow with compounding interest over time, making it easier for you to pay for college. The sooner you start, the more you will save by the time your high school grad off to college.
3. Search for Grants and Scholarships
Grants and scholarships are essentially “free money.” Your child receives these funds with no use or repayment requirements. In the 2021-2022 school year, the Department of Education gave out $25.4 billion in Pell Grants to 6.1 million students. While there are caps to these options, there is no limit to how many opportunities your child can apply for.
It’s also worth filling out the Free Application for Federal Student Aid (FAFSA). Most students qualify, and some of the money—like scholarships, grants, and work study funds—you can keep without having to pay back.
4. Study Student Loan Options
The average family needs to borrow money to send their kids to school. In fact, 58 percent of students graduate from public colleges with debt. Loans may be federal or private, though federal loans are generally preferable due to lower interest rates, periods of forbearance, and flexible repayment terms. Parents may need to co-sign loans assumed by their children.
It is critical that parents and college students are well-informed about the undertaking of their debt relative to the value of their education and ability to repay the amount due post-graduation. Student loan debt is a paralyzing issue for many college graduates long after they’ve entered the workforce.
5. Take AP Classes
Advanced Placement classes can help your children earn college credit during high school—assuming the institution they attend accepts AP credits. In some cases, AP courses may count toward an introductory level course, while other times they may satisfy an elective requirement.
Feasibly, taking AP courses can help your child satisfy their graduation requirements for free (if they are in public school) and even graduate early, thereby saving money on perhaps an entire semester depending on the number of credits your child enters college with.
6. Have Your Small Business Pay for Tuition
If you own a small business with a tuition reimbursement plan and your kids work for you, you may be able to have your company help pay for college. Or, if your child is working a part-time job, find out if the employer covers educational expenses.
Employer-Provided Educational Assistance Benefits are an excellent way for employees who wish to complete or continue their learning. It’s a win-win for employers who can take advantage of tax savings while expanding the skillset of valued employees.
7. Consider Other College Savings Accounts
Though 529 plans are the most common kind of college savings account, you may also want to look into other kinds of accounts such as:
- Coverdell accounts, which are “education IRA” accounts that can be funded with up to $2,000 each year. Keep in mind that money saved in Coverdell accounts must be used on education and be fully distributed before the beneficiary reaches age 30.
- Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) custodial accounts, which your children can use to hold and protect assets until they turn 18 or 21, depending on the state.
- UGMA accounts can hold stocks, bonds, and mutual funds, but not riskier assets like stock options.
- They can also hold real estate assets.
- Funds in UGMA and UTMA accounts are subject to taxation and can be used however the owner wants once the child reaches adulthood.
By offering your children the opportunity to attend college, you can provide them with a solid foundation for personal and professional growth. Besides imparting essential skills and knowledge, higher education can enhance their chances of securing lucrative employment opportunities.
Moreover, the modern job market places a strong emphasis on educational qualifications, with 268 occupations now requiring a bachelor’s degree or higher. As a result, there’s some pressure to afford your child every opportunity by supporting their higher education goals.
READY TO START SAVING FOR COLLEGE? A FINANCIAL ADVISOR CAN HELP
Though college offers a pathway to a bright future, the financial planning aspect can seem like a roadblock. The good news is that you don’t have to go it alone. A financial advisor can provide insights and sound advice based on your personal circumstances to help you save the most you can, without jeopardizing your cashflow and other long-term goals.
Schedule a consultation today to see how EP Wealth Advisors can help.
