Saving for Your Child's Education
Saving for your child’s education is undoubtedly a daunting task. College tuition costs and fees are consistently increasing year after year, leaving parents and students wondering how they can properly save to avoid significant debt following graduation. According to Sallie Mae, only 56 percent of parents who expect their child to attend college have started saving, and even fewer have developed a specific plan to cover secondary-education expenses. If you are wondering how to start planning for your child’s education, read on to learn about some of the savings options available to you, when you should start saving, and how much you should save.
- Personal Savings
The most basic way to start saving for your child’s education is to open a standard savings account dedicated solely to education expenses. If your financial situation allows it, consider opening a money market account or certificate of deposit. These alternative methods usually pay a higher rate
of interest and allow your savings to grow more quickly than a standard savings account. In exchange for higher interest rates, these alternative methods require a higher minimum balance to open and have other restrictions. While a money market account limits the number of transfers and electronic payments that you can make per month, the funds that you place in a certificate of deposit are typically inaccessible for the chosen term (ranging from 3 months to 5 years). If you decide to withdraw funds from a certificate of deposit before its maturity date, you will have to pay a withdrawal fee. Learn more about the personal savings options offered by the Institution for Savings. - 529 College Plan
A 529 college plan allows the holder to invest after-tax money into an account that can later be accessed to fund a beneficiary’s education. Funds can be withdrawn tax-free, but only for qualified education expenses. A 529 plan allows holders to make large investments (up to $300,000 in most states), but retrieving your money can become complicated if your child decides not to attend college. In this situation, you can change the beneficiary of the plan or use the funds to cover expenses for private K-12 education. Generally, a 529 plan always covers tuition costs and mandatory fees and might also cover technology expenses (such as a laptop), internet service, meal plans, or room and board. However, a 529 plan cannot be used to pay for cell phone, transportation, or elective activity expenses or student loans.
If you choose to save for your child’s education with a 529 college plan, you have the option of selecting either a college savings plan or a prepaid tuition plan. A college savings plan allows the funds to be spent on qualified education expenses at any eligible school. Meanwhile, a prepaid tuition plan allows the funds to be used to prepay for one or more semesters at a specific school (or several specific schools) at the current price. While a prepaid tuition plan allows you to avoid yearly increases in tuition costs, this plan might have more restrictions regarding eligible expenses and complications might arise if your child decides not to attend the designated school(s).
A 529 college plan offers attractive tax advantages and ensures that your savings will be used for education expenses. The best choice depends on your individual financial situation and your child’s unique education plan and preferences. - When to begin saving
It is never too early to start saving for your child’s education, even if he or she is still many years away from heading off to college! The earlier you start saving, the more interest your contributions will earn in the long-run.
In the beginning, consider automatically depositing a small portion of your paycheck into your child’s education savings each month. As your child grows older, gradually scale up the amount you save each month; consider using one of the aforementioned savings methods with a higher interest rate (i.e., a money market account or certificate of deposit, or education-specific investment account such as a 529 plan). - How much to save
How much you should save for your child’s education depends on several factors: your specific financial situation, including whether your child will qualify for financial aid, the percentage of your child’s education expenses that you plan to cover, and whether your child plans to attend a public or private institution. One way to determine how much to save for your child’s education is to divide the current projected cost by the number of months remaining until your child heads to college. You can then incorporate this amount into your monthly budget and start saving on a regular basis.
Another strategy, suggested by Fidelity Investments (assuming you use a 529 college plan), is to multiply your child’s age by $2,000 as an approximate measure of whether you are on track to cover half the average cost a four-year, public institution.
Additionally, if you have a list of schools to which your child plans to apply, you can use each school’s Net Price Calculator (provided on their websites) to get an estimate of the financial aid package that your child will receive if he or she is accepted. However, keep in mind that your child’s financial aid package will not necessarily be comprised entirely of grants and scholarships, but will likely also include work-study programs and student loans.
To gauge your savings progress, check out Fidelity Investment’s college savings calculator.
According to forbes.com, tuition at public four-year institutions increased by 213% in the past 30 years and nearly half of the 22 million Americans with federal student loans were either behind on payments or received permission to postpone payments due to economic hardship. Consequently, as of January 2019, more than 44 million Americans collectively owed $1.5 trillion in student loan debt, according to huffpost.com. While student loan debt can certainly be daunting, ignoring it will only cause you more stress than is necessary. There are many ways to improve your ability to pay off your student loan debt in a timely, cost-effective manner. Read on to learn more about how you can speed up your student loan repayment process and consequently save money on interest payments.
- Pay more than the monthly minimum
Whenever possible, make more than your minimum student loan payment each month. Making extra payments will help you pay off your student loan debt sooner and will reduce the amount that you pay in interest charges over time. However, communicate with your loan servicer to ensure that any extra payments are put toward your loan’s current balance, rather than the next month’s payment. - Prioritize paying off your student loan debt
Rather than ignoring your student loan debt in favor of discretionary spending, you should make paying off your debt a top priority after covering necessary expenses such as food, rent, and health insurance. Once allocating money for your monthly student loan payments, you can structure the rest of your budget around your remaining funds. - Earn extra income
Any extra income that you can earn will help you pay off your student loan debt faster and therefore lower the amount you pay in interest over time. Whether you work a part-time job on weekends, rent out your spare room, or sell clothing or other items that you no longer use, you can put the extra money that you make towards your monthly loan payments. - Refinance your student loan
If your credit score, income, and history of debt payments will allow it, you can elect to refinance your student loan to get a shorter repayment period. Although a shorter repayment period will require you to make higher monthly payments, it will also provide you with a lower interest rate. - Make biweekly payments
Making biweekly payments rather than monthly payments will speed up the process of paying off your student loan debt. With this trick, you’ll end up making an extra payment each year, which will shorten your repayment period and decrease your interest costs. - Sign up for automatic payments
A simple way to prioritize your student loan repayments and to potentially save money is to sign up for automatic payments. Automating loan payments from your bank account will not only ensure that you pay on time and never miss a payment, but it might also secure you a discounted interest rate in return. - Take advantage of student loan repayment assistance
Although rare, your employer might offer student loan repayment assistance, which you should take advantage of if possible. Doing so could save you hundreds to thousands of dollars every year.
As always, please contact us with any questions or concerns.