How To Strategically Save For College
Saving for college for your child is one of the hardest financial planning tasks you can undertake. Think about it – you are basically being asked to save $250,000 in today’s dollars and then grow it to keep up with inflation. It many ways, it’s like climbing Mount Everest – and it seems like only a few make it out alive.
So how do you survive and succeed in taking on this challenge, where the numbers are stacked against you. Annual tuition for private colleges currently averages $34,780. But for a number of schools, it can be as high as $65,000. And since education has an inflation factor in the 5-6% range, it may seem insurmountable.
Another thing to keep in mind is that higher education has no incentive to adjust their tuition. They know that ultimately students will take out loans to cover the costs. It’s a vicious cycle, as those loans will become a huge financial burden once your child graduates.
There is no perfect way to plan, but using a combination of strategies can enable you and your family to succeed in education planning.
Here are three steps you can take to start moving the ball forward on funding your child’s education. Part of it is the traditional path and part will require you to think outside the box.
Use a 529 as a Base – 529 plans are a great tool for education funding and whether you can fully fund them or not, you should factor them into your strategy.
When you open the account, you are the account owner and the child is the beneficiary. When you fund the account, you are gifting the funds to the child. The funds are invested and the money grows tax-deferred. When the child is ready for college, you can withdraw the funds tax-free, provided they are use for qualified tuition and education costs.
Every penny you put away for your child will help, so your mindset should be to always fund the 529 plan. An easy approach is to set up an autopay directly from your bank account, in an amount that you can manage every pay period. Whatever the amount - $50, $100 or even $1,000 - KEEP FUNDING.
Finally, be smart about the plan you fund. The biggest mistake parents make is not researching low-cost, age based 529 plans. Low cost means the plan has all-in costs less than 1%. Fidelity, Vanguard and T Rowe Price often have good options. Age-based means that the investment company handles the asset allocating for you based on the child’s age. So if you are setting up the plan for a toddler, expect to have more equity exposure in the early years, and a more conservative allocation during the child’s teen years.
The most important thing is to fund the plan, even if you start with a small sum. By putting away $100 a month from the time your child is an infant, tax deferred growth on the 529 investment could result in almost $40,000 saved, by age 18.
Get Your Child Involved – Too many parents take on the education burden and don’t share with their children how challenging it is to cover the costs. Education funding should be a family financial discussion and every member should think about how they can contribute.
Your child can have a direct impact on their education funding by applying for scholarships - and not just one or two scholarships. Apply to as many as possible. Statistics show that it takes 10 scholarship application attempts to get one award.
Use sites such as Scholarship.com, Cappex.com and Unigo.com, all of which have ways of searching for available funds using various filters.
The real key is to be aggressive and to know the calendar. Twenty eight percent of all scholarship deadlines are in March. However, Nerd Wallet found that the larger value scholarships are often awarded in September and October with a median amount of $5,000. So in addition to completing college applications on time, you must also factor in the scholarship deadlines.
It’s wise to start scholarship planning before the child’s senior year. As a junior, your child should start reviewing what scholarships might be appropriate, along with the specific requirements. Most scholarships require similar information and getting that material ready will provide a head start on the application process.
Finally don’t forget about local scholarships. Many local organizations such as Rotary support scholarships for graduating seniors. When you are competing locally, it is a smaller pool.
Assess Overseas Options – Finally education can be obtained anywhere in the world. While attending an American university or college is often the goal, don’t rule out going to Canada, the UK or other European countries. Tuitions are often much lower than in the US. Canada, for example, has a rate for citizens in the range of $7,000 Canadian a year. For US students, it ranges from $20,000 to $27,000 Canadian – much lower than private colleges in the US.
Further, overseas schools might require fewer years of study. In the UK, a bachelor’s degree typically requires 3 years of study (assuming the student meets entry requirements), which could be a huge savings when planning for school.
There is no magic formula for education funding for the majority of Americans. It requires considering all the “wants” when doing the required financial planning. But by being active, engaged and strategic, you might be able to get ahead of the demands, versus letting education funding just happen to you.