Do you have enough money saved to send your kids to college? Most families plan to save about a third of future college costs for each child. However, most families fall short of this goal, only saving around 10% of college costs by the time the child turns 18.
What Does College Really Cost?
Per an article from Northwestern Mutual, “the average cost of tuition, fees, room and board for 2018-2019 was $21,370 for in one year as an in-state student at a state school and $48,510 for a private college, according to College Board. That adds up to $85,480 for four years at a state school and $194,040 at a private college.” And we all know every year the price of college rises. So, whether your children are babies or only year away from college, you might be asking yourself, where should I start or what are my options?
Student loans are one of the most common ways people pay for higher education. According to debt.org, “the latest studies say that 70% of college graduates leave school with student loan debt that averaged $38,000 in 2017. ” Furthermore, that amount of debt equates to payments of “$382 a month for the next decade” after graduation. These figures don’t factor in what happens if someone elects to make their payments lower and interest higher.
One of the noted effects of all this debt is a decrease in graduates buying houses, starting businesses and getting married soon after college. Parents who set up savings plans can help their children avoid the need for a substantial amount of student debt.
Options for Saving Money
There are a number of ways parents can save money for their children’s’ education. A few popular options include:
529 College Savings Plan
An account where you can contribute money to an investment portfolio that can grow of decline in value based on the market.
529 Prepaid College Tuition Plan
An account that allows you to “lock in” tuition amounts at current rates within your state.
An account where funds can grow tax-deferred and can be withdrawn for educational expenses but left for retirement if not used.
There are a number of things to consider when setting up one of these accounts. For instance, if your child does not go to college, the money in the 529 College Savings Plan is spent on non-qualified expenses (that is, not on college tuition and related expenses for the beneficiary), account owners pay ordinary income taxes and a 10% additional tax penalty on earnings. It is best to work with an expert to help you weigh the pros and cons of all your options.
What About Scholarships?
A select number of students receive sports or academic scholarships that pay for some or all of college, however, the number of these types of scholarships is small. Every year there are millions of dollars in scholarships that were unclaimed or not applied for, so students should certainly apply for all the scholarships they can find. Unfortunately, given the average cost of college today, it’s unlikely you will cover all your expenses with scholarships. This is why it’s important to start saving as early as possible.
What is the Best Choice?
Most people are going to benefit from a combination of all of these solutions. Ideally, you should start putting money aside on a monthly basis from the moment your child is born, if not before. Your best options for this are having a 529 or other College Savings Plan.
Then, once your child is applying for schools, they should also apply for as many scholarships as they can.
If you are using your savings to help your child pay for college, you can also reap some tax benefits. Under the “Qualifying Child rules, you can claim college students as your dependents” per Business Insider. They should receive a Form 1098-T, Tuition Statement which reports the amount of qualified education expenses paid for by you during the tax year.
Finally, student loans are a viable, and quite commonly used, option to cover the rest of the expenses.
The key takeaway here is advance planning gives you the best results when it comes to avoiding student loan debt. Remember, the earlier you start saving the better. If you start saving for your child’s future the moment you find out you’re going to have a baby, every month you can save some amount of money for their education.
At Filipek & Company we can help create a plan for you to save for your children’s education in a manageable and impactful way, and we can project how much you need to save for college.