Higher education is becoming not only more valuable in the job market but also much more expensive. Though the price may be steep, it’s not impossible to help your kids cover their college costs.
As a parent, there are strategies to help you save for your kids college tuition. Keep reading to learn how you too can build a robust college savings account for your future graduate.
Here’s an all-in-one guide on how to save for your kid’s college.
The 529 Plan
When saving for college, 529 accounts are the most popular option. These accounts are legally known as “qualified tuition plans,” and are authorized by section 529 of the Internal Revenue Code.
529 accounts let you put aside money for college where it will grow tax-free. Your contributions, however, are not tax-free. You will still have to pay state and revenue tax. There are some states that let you deduct a portion of your state tax from your 529 contributions. With high contribution limits, this plan is both tax-effective and useful.
The funds in a 529 account can be used at any time for any qualifying higher-education expense.
What qualifies as a higher education expense?
You can pull out money from your 529 account as needed. It will be untaxed so long as you use the funds for one of these expenses:
- Tuition – Course tuition costs.
• Fees – Application fees, per-unit fees and mandatory orientation fees. - Books – Schools require students purchase the most recent edition textbooks.
- Supplies – Aside from the standard office supplies, students may need book covers for rental textbooks, pens, paper and laptops.
- Equipment – If your student is an athlete or aspiring scientist, they may have expenses for sports equipment or lab equipment.
- Room and Board – applicable for students who are enrolled at least half-time.
Anticipate these fees in your savings strategy and help your child reach academic success without worrying about money.
529 Alternatives: UGMA/ UTMA & Roth IRA’s
If your child decides to forego college, there are limited options to use the funds in the 529 account. For this reason, some parents prefer more flexible alternatives.
Uniform Gift/Transfer to Minor Account (UGMA / UTMA) are custodial brokerage accounts. They are created with the intention of being passed down to your child once they are of legal age. These accounts are highly flexible, but don’t offer any tax benefits. In fact, gains and losses on this account are reported as your child’s income and count as a student asset on the FAFSA.
Some parents are using Roth IRA accounts for their children’s college savings. You could put it in your name or your child’s name if they are earning an income. The early withdrawal penalty will be waived if used on education-related expenses.
How to Make the Most of Your College Savings Plan
There is a general prioritization schema to meet your college savings goals in a timely manner.
- Your first priority is meeting your own immediate financial needs.Living debt free isn’t essential, but it is wise to arrive at an acceptable debt-to-income ratio before making significant contributions to any of your savings accounts, including your kids 529 plan. Next, decide on a retirement savings plan and set up your accounts.
- Set up your kids college savings account and begin making contributions.Set age-related goals for your college savings. For example, you could plan to have saved $100,000 by their eighteenth birthday, meaning your account should have $50,000 by their 9th birthday, and so forth. Use that rule to determine how much you need to contribute on a yearly or monthly basis
A Savings-Stratagem for All
As a parent, any contribution you can make towards your child’s education is generous. Don’t assume you have to cover 100 percent of the bill. For most, that’s unreasonable.
Instead, focus on meeting predetermined goals that are in line with your financial abilities. Some examples of an attainable college savings goal might be:
• Setting a modest budget for tuition costs.
• Paying for a predetermined percentage of their tuition.
• Planning to contribute half of all fees.
The Real Cost of College
Tuition costs are on the rise. CNBC reported a 25% increase in college costs within the last decade. According to that data and tuition averages from The College Board, you can expect a bill of at least $10,230 from a state university or $34,920 from a private college each year. This is before room and board, textbooks, and transportation.
Despite rising tuition expenses, obtaining a bachelor’s degree is still worth it. In a study conducted by The Federal Reserve Bank of New York that examined average wages, adjustments for inflation, and other labor market changes over time showed that bachelor’s degrees still showed valuable economic return.
In short, the bill for a bachelor’s is steep, but still worth the cost. And with the right strategy, you and your future graduate can mitigate student loans.
As the parent of a future scholar, you have the responsibility to give your child the highest quality education possible. This article is a resource for you to use along your college-saving efforts. Bookmark this for reference later as you make key financial decisions for the future of your child’s education.
