As a parent, saving for college for your children can seem quite daunting. When I went to college from 2009-2012, college seemed expensive. With rising inflation and less government aid, college costs have over doubled in the last 20 years. If this trend continues, college will become an unattainable goal for many American families. But there are ways to save for college and keep college costs below average.
How much should I save for my child’s college?
This is completely up to you. I’m not here to tell you how much to save or even if you should save for college. But, if you want your child to attend college someday and you’d like to help keep their debt to a minimum, here are some things to keep in mind:
The type of education your child plans to get will affect the cost of education dramatically. If he plans to attend a community college for a few years or live at home, these things will greatly reduce the expenses of college. If she plans to attend a private university and live on-campus, the cost will be significantly more. You can plug in your exact situation into this college calculator to help you ballpark the cost of college using the years your child will attend. This was both incredibly eye opening and super discouraging for me to do with our four kids.
Think through parameters like if you will pay for in-state tuition only, room and board, or all expenses. Will you require your child to get a job? Are you okay with them taking out student loans? Should they take a gap year or start at a community college for general education requirements if they don’t know what they want to do? Do you anticipate them receiving any kind of aid or scholarships?
Just because you want your child to attend college does not imply you will foot the bill. Be up front with your child as they are starting to think and plan for college so they know what your goals and plans are. Give them as much financial wisdom as you can, including helping them understand if they do take out student loans, the cost/benefit analysis for payback.
Often times, 18 year olds are given the freedom to take on incredible amounts of debt but they don’t fully understand what this will cost them down the road. Be honest and help your child make a budget and a plan. The worst thing you can do for your child is allow them to take out hundreds of thousands of dollars in student loans with no real plan for repayment. Regardless of if you plan to help or not, help your child by imparting financial wisdom and stewardship before they graduate to set them up for success in the future.
When should I start saving for my child’s college?
The answer is now! The earlier you save, the longer compound interest can work in your favor. Some plans offer advantages each year, so the more years you save, the more deductions or credits you qualify for. In Indiana, if you contribute to a 529 account, you can receive up to a 20% tax credit for your contributions. That means if you contribute $7,500 into a 529, it only costs you $6,000. And you’re earning compound interest along the way! It pays to start early because if you miss a year, you can’t get those tax deductions back.
What if my child doesn’t attend college?
Thanks to the new SECURE Act 2.0, any 529 contributions, in an account opened for 15 years or more, can be rolled into a Roth IRA, up to $35,000. This means if you save $35,000 and your child opts not to go to college, they can roll the amount, subject to income limits, and allow it to grow tax-free until retirement.
If you have other children, 529s are transferable as well. So if one child chooses to forego college but another requires some extra funds, you can transfer funds to a variety of family members. You could even go back to school yourself, without tax penalties.
529 plans
These plans are state-sponsored investment plans that enable you to save money for a beneficiary and pay for education expenses. You can withdrawal funds tax-free to cover a variety of educational expenses including tuition, fees, room and board, books, etc. In a lot of states, there are additional perks that seek to encourage participation. For instance, in Indiana, if you contribute to a 529, you receive a 20% state tax credit, up to $1,500, for your contributions. You can look up the tax benefits for every other state here.
Scholarships
This is my favorite part of saving for college – talking about free money! No, seriously, scholarships and grants, unlike loans, are free money that you receive and never have to pay back. My senior year in college, I applied for SO MANY scholarships. My goal was to attend a private, Christian college and due to what I wanted to study and knowing the potential income post-graduation, I knew I didn’t want to take out many student loans. I applied for probably 100 scholarships my senior year and you know how many I got? 6! Plus the aid I received from the college I attended. One of them I got simply because I was the only person who had applied!
Those 6 scholarships, plus my own savings and some help from my parents, funded my freshman year at a private university (with room and board!). Some of these scholarships were renewable each year as long as I maintained a certain GPA. I was able to cash in year after year. Even if I spent 50 hours filling out scholarship forms (some were random entry, others required an essay or more lengthy application), I calculated that I probably made $200-$250 an hour my senior year with the scholarships I was awarded. That is a way better paying job than I could find in Indiana. If you have a child nearing college, have them start looking and applying for scholarships! Free money for college!
Know Your Number
The younger you and your children are, the longer you have to let compound interest do it’s magic. If you start the year your child is born and invest just $100/month, 18 years later, you should be sitting on roughly $48,000. If you decide to do $200/month, it would be over $96,000. Decide now how much you can put toward college or what your number is, and reverse engineer it. Be honest with your kids as they get closer about how much you plan to help. Then, give them creative ways to keep costs low. Applying for scholarships and grants, living at home, taking AP/dual enrollment classes in high school can help. But most importantly, NEVER go into debt to put your kids through college. Start saving today and you’ll be surprised how much you can help them later on.
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