How to Save For A Child’s Higher Education
According to an article posted in CNBC.com, the cost for an academic year from 2010-2011 is approximately $56,500 including tuition plus room and board. And since that only covers a year of education, it seems students are looking forward to a four-year degree at the cost of $200,000.
If you’re looking at the age of your kids right now, it seems inflation and the rising cost of consumer goods will hike up this price even more in the following years to come. With the home mortgage still racking up bills, and the impending date of retirement drawing even closer, how can we save for our child’s education? Below are some tips that could effectively leave you with some breathing room when enrollment time finally comes.
Tips to Save More and Save Smart:
This tip applies to just about anything. Whether your child is ten or two, the best time to save for your kid’s education is now. This theory isn’t just about having more time to save more, it’s about using the power of compounded interest to your advantage. Compounded interest allows the interest you’ve earned to earn even more interest. Meaning, the more time your money is left in a savings account, the more earnings it can accrue.
For example, if your started saving at $5,000 per year for your child at the age of ten at an interest rate of 11%, by the time your child reaches 18 years of age, you would have a total of $65,820.39. Total money invested? Only 40,000. However, if you started saving the same amount per year for your child when he was only two years of age and at the same interest rate, by the time he reaches 18, you would have a total of a whopping $217,505.95. Total investment? Only $80,000.
Choose Where To Save
There are different platforms you can choose from when it comes to saving for your child’s schooling. Some of these areas have different benefits such as a higher interest rate, or tax advantages. It depends on you which investment vehicle you are most comfortable using, and what would give the highest and safest returns when your child is ready to go to college.
- Certificates of Deposit – Although savings accounts have been the most common choice for most parents for many years, this type of account offers the lowest interest rate next to burying your money underground. A better alternative would be certificates of deposit. These are instruments that give a fixed interest after the maturity date. This is one of the safest places to put your money, however, its rates are still lower than other options.
- Educational Savings Account – Governed by IRS regulations, earnings from this account are tax-free if used for qualified education expenses. However, contributions are limited to only $2,000 a year, and there are some qualifications that must be met before account opening.
- Prepaid College Plans – Having a prepaid plan allows parents to start paying for college tuition at current prices. Although room and board costs will not be covered, this plan offers tax-free benefits on expenses used for education. The only downside is if your child chooses to go to school elsewhere. Some plans do allow students to go to out-of-state colleges, but they will only fund at the tuition rate of the in-state college. Students and parents must then pay whatever the difference in tuition fees. Another concern is that some states will charge a penalty for the cancellation of prepaid college plans, which will result in a loss to whatever interest is earned.
- 529 Plans – These are state managed investment accounts that allow larger annual contributions as compared to the ESA. Earnings as well as withdrawals are also considered to be free from federal taxes and furthermore will not affect a student’s eligibility to receive financial aid. However, this type of account carries more risk since it is subject to the stock market’s volatility, and thus is not guaranteed to make a profit at the time when you need it the most.
- IRA retirement plans – It is actually possible to withdraw money from an IRA retirement plan that will not be charged a 10% early withdrawal. This exemption is only applicable if the money is to be used for qualified education expenses.
Other Useful Tips
When it comes to saving for your child’s education, it may be beneficial to consult with a financial planner who can help you understand how to better manage your money. It is important to recognize that saving for your own retirement should be put first before your child’s education since this goal is considered to be more important. It is also beneficial to start thinking whether or not you will encourage your child to take on a student loan to cover extra cost. If this is the case, begin preparing your child for this occurrence.
It is also smart to put any accounts for college savings under your name rather than your child’s since any asset under your child’s name could be counted against him or her when he seeks financial aid. This is especially true for federal funding.
A college education can be a great financial burden for both the parents and the student, which is why it is crucial to prepare for it as early as you possible can. Creating a savings plan and saving early can both be effective strategies for reaching your financial goals in terms of education.
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How was your college education paid for?
If you currently have children what are you doing to pay for their higher education?
How much do you expect the higher education to cost?