According to the Simple Dollar, about 19% of students owe no less than $50,000 at the time of graduation. This is no joke for any parent or student.
As a result, parents are thinking of ways to save for their children’s education as soon as possible to avoid such ballooning debts. However, this can be quite difficult, and the real question is how can parents start savings for their child?
Sallie Mae found out that 29% of low-income and 36% of middle-income American families save for their children’s college education. The same report indicates the average family plans on saving about $38,953 for a single child for college but end up saving only half.
What follows are some ways you can use save for your child’s college education.
Start Saving with a Savings Account
Different parents save for their children’s education using different types of savings accounts. Some include a certificate of deposit (CD) and savings accounts. In fact, these accounts take up a huge chunk of savings.
You can start putting funds into these accounts as soon as your child is born. By the time they get to college, hopefully, you’ll have more than enough to fund their education.
In the United States, there are at least 30 states offering 529 plans to help parents save for their children’s education. You’ll sometimes find these plans referred to as Qualified Tuition Programs. This is how they operate.
After taxes, you’ll stash away some amount in the plan, then you can withdraw the funds at a later time with the interest gained during the period. You can then use the funds to purchase school books or pay for college tuition.
These plans differ from one state to another, from the yearly fees, operating costs, interests gained, etc. In addition, the maximum contribution toward the plans also varies. The advantage is those maximums are higher than Roth IRAs.
One of the drawbacks in this plan is should your child fail to secure a spot in a college, you’ll have to deal with tax penalties and fees while withdrawing the money. However, you can avoid this if you have another child by transferring the funds to them.
Depending on the 529 plan you’re on, you can start by making little contributions and then scaling up as time goes by. Keep in mind, making changes is difficult.
Make A Wise Use of 2k Rule
However, college cost may depend on various factors like where a child goes for education, locations and other things. For this strategy rule of the thumb is that you need to multiply your child actual ages by $2k. That can cover almost half of the cost of a four-year college term.
Suppose child age is 5 year than parents need to save at least $10k per year or $2,000 for 5 times. This can easily make parents confident enough to pay for the average cost in a state university.
A Roth IRA is more or less like the 529 plan. The only difference is you can use the account to save for your retirement and at the same time, save for your child’s college tuition. The same concepts used in 529 plans apply here.
After taxes, you can put away some amount in this account and reap interests over a certain period and later withdraw the funds tax-free and without any penalties when you hit retirement age.
However, you can withdraw the funds should you encounter difficulties in paying for your child’s education. As long as the educational expenses qualify, you can withdraw the funds’ penalty and tax-free.
Another difference between the 529 plan and Roth IRA is should your child fail to qualify for college, you can continue saving for your retirement using the latter.
The drawbacks come in the form of contribution and income limits. Single American taxpayers with an average income above $129,000 per year and couples earning $191,000 don’t meet the criteria. Also, you’re only allowed to contribute a maximum of $5,500 a year or $6,500 if you’re above 50.
Setup Financial Goals & Avoid Borrowing
It is critical to set up some financial goals if you have low or average income. Following a strict financial diet can help to save a decent amount of money monthly. We all know that we burn the cash than it is required often. Why because people are not usually aware that what is necessary or what is not.
Now it is people’s choice what they are willing to do with that saved amount. They can invest that money in decent small investment options for the long term. This might undoubtedly help extra while your child education.
Many times, urgencies can become unavoidable and when you do not tend to save money regularly, this can force anyone to take unwanted loans from short-term high-interest realisticloans.com lenders. This would disturb your goals for long-term so being financially disciplined can avoid borrowing instances for sure.
Prepaid Tuition Plans
This plan is quite attractive to many parents. It works in a different way from the previous plans. As the name suggests, this plan allows you to pay for your child’s college tuition fees in advance. This plan protects you from any hike in tuition fees before your child starts college.
For example, if a certain college charges $15,000 a year, $7,500 in the form of contributions will go into buying 50% or half of the tuition fees before your child goes to college. If the same college hikes its fees to $25,000 when your child reaches 18, the initial $7,500 contribution will now rise to $12,500 which is still half the total tuition fees.
The drawback to this plan is you’ll be charged a 10% penalty and income tax on the money used for other expenses apart from tuition. Nevertheless, you can switch beneficiaries like in 529 plans.
UTMA and UGMA Accounts
Uniform Gift to Minors Act and Uniform Transfer to Minors Act are gifted in the form of finances held in custody of someone else until the child gets to 18.
These accounts come with lesser tax benefits compared to 529 plans. Also, different from other saving plans, the accounts and the funds inside belong to the child and not you. This means once the child gets to 18, they may use the funds available to pay for the college tuition, or they can use it for different purposes.
The Coverdell ESA
If the funds in this account will be used for education alone, you’ll benefit from tax exemptions like in 529 plans. Also, this account is considered yours and not your child’s, meaning it will have little impact on the amount of federal aid your child can get.
You can use Coverdell ESAs to pay for other education-related expenses such as K-12 costs like private school fees. There are limits though. For example, you can only make a maximum of $2,000 in contributions for a single child per year.
If you make more than $95,000 for single taxpayers and $190,000 for couples, you may not be eligible. Also, the funds might be taxed if they aren’t used by the time the child turns 30.
Gift of College
In this program, friends and relatives can directly save for your child’s education by contributing to the 529 plan. The catch, however, is a 5 percent processing fee and about $15 a transaction every time you receive gifts.
During birthdays and any other celebration, friends and relatives tend to give clothes and toys. Instead, ask them to contribute toward the gift in order tohelp them in their education.
This is also similar to leaf savings where friends and family can contribute funds towards the child’s education. The noticeable difference is in leaf, they will choose a suitable gift card to send via email, mail or Facebook.
Once you receive the card, you use the amount and make a transfer of the fund to a 529 savings plan.
Saving, in general, can be a daunting task, but saving for your child’s education can be even more difficult if you don’t know where to start. However, with these pointers, you can secure your child’s education with little difficulty, especially if you start early.