Graduation season is here and that might have you wondering, “How do I save enough for college?” Great news: Thinking about saving now means you’re taking a step in the right direction. So, check out the tips below that’ll help you get started.
Saving for College Can Be Easier If You Start Earlier
Two words: compound interest. Think of stowing money away today in a college fund for your child as maximizing your return for tomorrow. Even if you start small, saving now gives you a better shot at a bigger educational nest egg—and more financial options—down the road.
Is it True That Only Rich People Can Save for College?
More than one-third of American families from all income levels have a plan in place to pay for college, according to a 2017 Sallie Mae study.
And in some states, you can kickstart college savings plans with no restriction on minimum contributions. Contributions can be as low as $25 and any amount you put aside now can help set your children on the path toward a promising future.
How Do I Know How Much to Save Per Month for College?
Start by figuring out your ultimate savings goal. The College Board’s College Cost Calculator can help you determine how much you’ll need to have stowed away by the time your kid enrolls. Keep in mind that many students now take more than four years to graduate.
Next, consider the monthly contributions you’ll need to make based on your budget. Consider using recurring deductions from your paycheck to make it easier.
Can I Save for College, Retirement and Expenses at the Same Time?
We know that it’s important to plan for retirement, and you don’t want to put it off—even for something as important as a college education.
To find the best way to save for college and retirement simultaneously, think about consulting a financial planning professional or using an online budgeting/planning tool—to strike a healthy money balance. Everyone’s personal finances are different but remember: While you can apply for student loans, scholarships and grants for college, there’s no borrowing for retirement.
Here are a few more tips to get you started:
- Use a standard college savings account. This one gets a thumbs-up for flexibility—but know that you may also get a return that’s lower than other investment options. To help ensure you’re getting the best possible return, shop around.
- Investigate tax-sheltered 529 plans and find a good fit. Start by looking into the 529 plan sponsored by your state of residence, which may offer added benefits. Some states also allow you to purchase prepaid tuition credits (but not for room and board) at today's costs as a hedge against future increases.
- Maximize your retirement savings opportunities. Keep up with your 401(k) contributions (or start making them if you haven’t already). Also take advantage of employer matches if they’re offered. In so doing, you’ll automatically deposit money from your paycheck and watch it grow tax deferred. You can’t withdraw these funds before you retire and apply them toward your child’s college education without a penalty. However, you’ll have peace of mind knowing money will be there for you when you’re ready to retire.
Ask family members (and even friends) to make contributions to your child’s 529 plan in lieu of birthday or holiday presents. Let your parents and in-laws know that this is an area where you’d appreciate their two cents—literally. Many states offer tax benefits to grandparents who maintain or contribute to a 529 plan.
Will I Lose the Money if I Don’t Use the Savings for College?
Your smart planning can still pay off even if you child doesn’t go to a 4-year college. If you’ve contributed to a 529 plan, you can apply the money saved towards accredited trade and vocational schools. Some plans may allow you to transfer funds to a sibling—although sometimes at a penalty, so know before you invest.
Also, once you have teens earning money, you may want to think about opening a Roth IRA in their name because of its versatility. If they decide not to pursue their studies, they can apply it to the purchase of their first house or even retirement. Big bonus: In most circumstances, they won’t owe taxes on the funds when they withdraw them.
Can My Child Miss Out on Financial Aid if I Save For College?
Your savings won’t affect your child’s eligibility for federal loans. And, if your kid is up for a merit-based scholarship, your savings won’t affect that either.
When it comes to need-based aid, there are three factors that determine how much your child may qualify for: cost of attendance, outside financial resource contributions and expected family contribution.
In a nutshell, the amount you’ve saved is just one of the factors that decision-makers consider when you apply for federal or state financial aid.
Shouldn’t Scholarships and Financial Aid Be Enough?
Even if your child gets a full ride, or your state offers free college tuition, there are still costs that come with college. Laptops, clothing, laundry, school supplies, gas…it all adds up.
What does this all mean? The time to start saving for college is now. Even baby steps forward will get you moving in the right financial direction.