Whether college is years away for your child or right around the corner, there’s no such thing as starting too soon when it comes to how to pay for college. And you want to make sure that when they do head off to school, you’re able to provide an education that doesn’t bury them in student loans. While tuition isn’t getting any cheaper, there’s a lot you can do to start saving for your child’s future today. So, before you’re ready to take pictures of them in their graduation cap, use these 5 tips to make the most of how you plan to save for college.
Setting a specific and realistic goal is a good first step to making a college savings plan. When you have a number to work toward, it's easier to know how much to save for college. For example, the average annual tuition at a public college for the 2015–2016 academic year was $23,300 while tuition at a private college ran upward of $47,400.1
And this kind of strategy pays off: In families where parents made a plan before their kid enrolled in college, the student ended up with 1/3 less student loan debt compared to students whose families didn’t make a plan.2
You can also encourage your child to apply for other opportunities that can support your college savings like scholarships and grants. More than 80% of U.S. students receive some form of financial aid (scholarships, grants and other aid), which means the amount you save for college may go further than you think.3 With less student debt, they can start saving for their future as soon as college is over.
If you’ve already started saving for other milestones like retirement, you may be thinking about borrowing from a 401(k) or other accounts to pay for college. But the options available to borrow for education make touching your nest egg a last resort. If you’re just starting to save for college, it helps to figure out what kind of savings account makes the most sense for you. Remember that even small savings can grow a lot with time. For example, if you put $2 a day (the cost of a morning coffee) in an account that earns 1% interest, you’ll have more than $12,400 18 years later when your kid heads off to college.
If you’ve been putting money aside in a college savings fund like a 529, you could save with a tax credit by paying some of your child’s education costs out of pocket first. Paying less in taxes means more money for you to use as you want. If you qualify for the American Opportunity Tax Credit, you can get a credit of up to $2,500 for certain education expenses.4 There’s also the Lifetime Learning Credit, which covers costs other than tuition and books like activity fees that all students have to pay.
You can claim only one of these credits in a single tax year.5 Once you’ve used as much of either credit as you can, start tapping into your 529 savings.
Even when they’ve started college, keep adding to your child’s college fund. Four years of school is a long time, and money you deposit for books or a new computer can grow each term to help cover the costs when they want an apartment senior year. After graduation, they may be looking at graduate school, and any extra college savings will come in handy. If more school isn’t part of the plan, certain kinds of accounts, like the 529, let you transfer the money to another child. This can be really useful for families with multiple children.
Remember that you don’t have to reach your college savings goal alone. Family members and friends are often willing to pitch in, and whether their contributions are large or small, every little bit helps. Birthdays, holidays, graduations and other special occasions are great times to ask that some gifts be put toward a college fund.
You can even help your kids develop good saving habits early on with their own savings account. Make a big deal out of it, get dressed up and go to a bank together. Then, round out the day with a grown-up lunch date. However you choose to do it, you’ll be including them in the process, giving them a healthy respect for their money. They’ll have an account to put part of their paychecks into when they pick up a summer job. Not only will it help pay their bills after high school, but it’ll give them a leg up on handling finances as an adult.
Saving for your kid’s education can be a stressful task, but knowing your options is the first step to sending them to their dream school. No matter what kind of account you plan to use (or are already using), these tips may help you stay on track with saving for college. That way, when your child graduates high school, you’ll feel prepared to support them in their next adventure.
This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
The Condition of Education: Price of Attending an Undergraduate Institution. (2017, April). Retrieved from: https://nces.ed.gov/programs/coe/indicator_cua.asp
How America Pays for College 2016— Sallie Mae. (2017). Retrieved from: news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2016FNL.pdf
Digest of Education Statistics, 2016. (2016, November). Retrieved from: https://nces.ed.gov/programs/digest/d16/tables/dt16_331.20.asp
American Opportunity Tax Credit. (January 2017). Retrieved from: https://www.irs.gov/individuals/aotc
Lifetime Learning Credit. (2016). Retrieved from: https://www.irs.gov/publications/p970/ch03.html
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