Did you know the average annual college tuition for a public school was $25,290 and $50,900 for a private school? College costs continue to rise and if you're not prepared, this could leave your student in a pile of debt and hurt their chances of financial success later in life. So, if you want to help your child avoid any financial distress and help them pay for their education, here's your complete guide for saving up for your kid's tuition:
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Prioritize Your Financial Goals
Just because your child's education is a priority, doesn't mean you should put your other financial needs on the backburner. You still need to plan for your retirement and additional financial and saving dreams. You have to balance planning for your future as well as help support your kids during their education. You don't want to put yourself in a situation where you end up going broke just to for your child's degree. Set a realistic expectation of what you can reasonably afford before making any financial commitment.
Remember, it's okay for your children to help with some of the financial burdens of going to school. This will not only teach them responsibility but will also give them ownership over their education.
Identify Ways to Cut Costs
While you are saving for your child's education, you can also find ways to cut costs in everyday spending. The earlier you start doing your research and find ways to lower the cost of tuition, the more money you will save over time. Here are a few ways to start cutting the cost of your kids' education:
- Encourage them to take college classes during high school.
- Research scholarship and grant options
- Look into more affordable community college courses
- Urge your child to start a side hustle so they can make extra cash while in school.
Find Investment Accounts that will Work for Your Financial Needs
Now that you have an idea of how much to save and contribute to your child's education, there are several account options that you should consider. Below, you can learn more about these account options:
529 Plan
This is a tax-advantaged saving plan that aids in your child's future education costs. These plans are sponsored by individual states, state agencies, or educational institutions. There are two types of plans, the Prepaid Tuition Plan, which allows a parent to purchase college credits in advance and the Educational Savings Plan which is a savings vehicle for future education expenses.
With the Prepaid Tuition Plan, you can purchase credits or courses for future college tuition. While these plans are typically used for both in-state and out-of-state public schools, most plans don't allow credits to be transferred to room and board expenses. With an Educational Savings Plan, you can save in an investment account that allows your funds to grow over time. The funds in this account can be used for elementary, secondary, or college expenses. In addition, Each state provides a plan that allows the saver to select an investment mix including various mutual funds or exchange-traded funds.
Roth IRA
Another account that is often used for saving for kids' college tuition is a Roth IRA. Typically, if a saver was to withdraw funds from their Roth IRA before they turn 59 ½ they would be subject to a 10% penalty. But if funds are used to pay for qualified higher education expenses, the penalty is waved. Savers contribute to this account with after-tax dollars and then when they go to take money out, withdrawals are tax-free. However, there are annual contribution limits for investors. This means that if you are under 50, you can contribute up to $5,500 a year and $6,500 if you are over 50 years old.
Coverdale Education Savings Account (ESA)
This account is a trust or custodial account that is set up for paying for high education expenses for a beneficiary. When you establish this account, the beneficiary must be under 18 as well as have written documentation for the account. A beneficiary can have as many accounts as they would like, however, there is a $2,000 total contribution limit for each individual. In addition, all distributions are tax-free as long as they pay for qualified education expenses.
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minor Act (UTMA)
These custodial accounts allow minors to own securities without the need for an attorney or legal trust documents. A UTMA also gives minors the opportunity to own real estate, art, royalties, or other assets. The income from accounts will be reported on the child’s tax return and, while funds can be used for any purpose, taxes may still apply. Lastly, it’s important to remember: this type of account may harm your child’s federal student aid allotment.
The Bottom Line
If you would like to help your child pay for all or part of their college education, start now! Do your research and determine which plan is right for you and your family. Begin researching scholarships and grant opportunities to help aid the financial burden that college often brings. By starting now, you will be better prepared for the future and set a great example for your children.