If you're a father, you've probably heard the adage that education is the key to your child's future success. You've definitely heard about the growing prices of a college degree as well.
According to U.S. News, in-state tuition and fees at public institutions have grown 212 per cent in the last 20 years. Tuition and expenses for out-of-state students at public schools have increased by 165 per cent. Private colleges, on the other hand, have witnessed a 144 per cent growth. College fees are rising, and you may be concerned about how to pay for them. Even if your children are still small, you are wise to consider how to begin saving for college.
According to a recent Fidelity survey, parents plan to cover an average of 65% of the overall cost of education. However, it was also highlighted that parents are only on track to fulfil 33% of their college savings goal. If you actually want to offer your child the gift of a college education while avoiding crippling student debt, the time to start planning is now.
When Should You Begin Saving for Your Children's College Education?
Here is the College Board's average yearly total cost of attendance figures for 2020-2021, based on a modest budget:
• $26,820 for an in-state four-year public college student
• $43,280 for an out-of-state four-year public college student
• $54,880 for a private college education
With such figures in mind, it's never too early to start saving for your children's education. Getting a head start provides your money more time to develop over time and recover from any dips.
It also means you can re-calibrate if your child appears to be on track for scholarships based on athletic or academic achievements, or if your child decides not to attend college. Keep in mind that the money you save will normally have an impact on the financial aid package your child is eligible for.
Before you start a college savings plan for your children, be sure you have all of your other financial ducks in a row. You should probably start by paying off any credit card amounts or other high-interest debt. Then check to see if you've paid off your own student debts, amassed an emergency fund (usually three to six months' worth of living expenses), and are on pace with your retirement savings.
After all, your child can always take out college loans, but you can't rely on it to cover a crisis or retirement. You wouldn't want to save for your children's college only to have to burden them with your living expenses after you retire because you didn't save enough.
The Most Effective Ways to Save for Your Child's College
If you're ready to start saving for college, you might be tempted to put that money in a savings account. While it may appear that this will shield your savings from market ups and downs, you may really lose money.
That's because even the best-paying accounts aren't keeping up with the rate of inflation. Investing your funds, especially if your child will not be attending college for a long, is one way you can watch your money increase. Remember that investments can lose money.
Here are some of the most effective methods for saving for a child's college education:
529 Savings Plans
A 529 plan, often known as a "qualified tuition plan," allows you to save for education while receiving tax breaks (the plan is named after the section of the Internal Revenue Code that governs it).
These plans have been available since 1996, yet most Americans are unaware of their existence. There are two types of 529 programs: educational savings plans and prepaid tuition plans.
State-sponsored educational savings plans allow you to start an investment account for your child, who can utilize the funds for tuition, fees, room and board, and other qualifying expenditures at any college or institution. You can also utilize up to $10,000 each year to pay for pre-college education.
You can invest the cash in a range of assets, such as mutual funds or target-date funds based on when your child is expected to attend college. The particular tax benefit you receive is determined by your state and plan. In general, you contribute after-tax money, your earnings increase tax-free, and you can withdraw the money tax-free for qualified expenses. If you withdraw money for any other reason, you will be subject to a 10% tax penalty on earnings.
Because not all states provide tax breaks, make sure to look into this when deciding on a plan.
As you might anticipate, prepaid tuition plans allow you to prepay tuition and fees at a college at current pricing. These programs are only accessible at particular universities, which are usually public, and they frequently require you to live in the same state. Given how much college costs are rising each year, a prepaid tuition plan can save you a lot of money.
You may be allowed to deduct payments from state income tax depending on the state and the 529 plan. However, if your prepaid tuition plan is not guaranteed by the state, you could lose money if the institution goes bankrupt. You also incur the chance of your child attending a school outside of the plan's service area.
Education Savings Account (Coverdell)
A Coverdell ESA, like a 529 educational savings plan, allows you to set up a savings account for someone under the age of 18 to pay for qualified education expenditures. The funds can be invested in a wide range of stocks, bonds, and other assets and grow tax-free.
Contributions are not tax-deductible, and the plan is only available to persons earning less than a specified amount (modified adjusted gross income of $110,000 for an individual or $220,000 for a married couple filing jointly).
When your child withdraws funds for approved educational expenditures, they will not be taxed on the amount. The funds can also be used to fund elementary or secondary education. However, you can only contribute $2,000 per beneficiary each year to a Coverdell ESA.
Accounts for UGMA and UTMA
You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a beneficiary under the age of 18, and any assets in the account will be transferred to the minor when he or she reaches the age of majority (at age 18 to 25, depending on the state).
The money is available for use by young adults for any purpose. That is, they will not be restricted to eligible education expenses. Another advantage is that you can contribute as much or as little as you desire. The disadvantage is that there are no tax advantages to making donations. Earnings are subject to taxation.
A custodial account is an irrevocable gift to the child identified as the beneficiary, who gains legal control of the account when he or she reaches the age of majority.
The Bottom Line
Given the rising costs of higher education, parents would be wise to start saving for their child's college education as soon as possible. However, rather than keeping the money in a savings account, they would be better off choosing an alternative that allows their money to grow.