When children are young, it’s easy to overlook saving for their future. Since monthly bills can be so big, and children are so small, saving for them doesn’t always seem necessary or pressing. Yet, we’ve all heard the saying that children grow up too fast. Usually this is said when reminiscing about rocking an infant, or hearing a toddler’s first sentence, or maybe even remembering when your now-teenager used to make it through an entire day without telling you that you’re the worst parent ever. Hopefully, if you’re at this last stage, you’ve been saving for your child’s college fund for a while.
When it comes to saving money, kids do grow up way too fast. When they are young, parents have to pay for diapers, preschool, private school — the list goes on. Often, planning for something ten, fifteen, or even eighteen years down the line seems improbable. Still, like most kinds of savings, the sooner you start, the better. Here are five ideas to consider when you are thinking about your child’s collegiate future:
1. Make a Long-Term Budget
According to Sally Mae’s study How America Saves for College 2013, only 50 percent of American families with children under 18 save for college, and only one third have an actual plan for how college will be paid for. Some parents feel that they can’t afford to save for college for their children and other parents feel that their children need to earn their college education through scholarships, apply for grants, pay for their own loans, or work during college. While these are valid points, these requirements can be especially successful if they go alongside financial help from parents.
The average cost for one year at an in-state college for 2013-2014 is $22,286, and private school tuitions average $44,750. Although these figures include housing, textbooks, meals, and fees, they are still quite daunting. Many Americans don’t think about a budget as a long-term project; but it can be. If your goal is to help each of your children pay for one year of college (including housing, fees, etc.) then you should be planning ahead, because $20,000 – $50,000 can rarely be saved over night. Savingforcollege.com has an easy college cost calculator that can help, as well as a way to compare various savings methods to see which is best for your family.
2. Use a 529 Plan
A 529 plan (named after section 529 of the Internal Revenue Code) is one of the best tax advantaged ways to save for college because it allows for tax-deferred growth of your savings. These plans are run by an individual state or by an institution, and they are designed to help families save for college costs. Usually, anyone can enroll in a plan regardless of where they or the beneficiary lives or chooses to go to school. The 529 plan provide several tax benefits. While tax contributions are not tax deductible, your investment will grow tax-free and payments for qualifying education expenses are not taxed.
Also, the 529 plan keeps you in control of the money; usually your child will not be able to use the money unless you give your permission, so you can control how your money is used. Depending on which program you select, certain trade schools, graduate schools, or community colleges may also qualify. Enrolling in the program is easy and can be done online or through mail, depending on the individual program you choose. You also have the ability to deposit large amounts into your plan, and you can change which 529 plan you use over time as well.
3. Consider a Custodial Account
A custodial account is an another tax advantaged way to save money. A custodial account is a trust that can be set up for a child, and is another possible way to save for college. However, once you gift your money to the child, you can’t take the money back. The money belongs to the child, but is controlled by the trustee until the child reaches 18, 21, or whatever age the beneficiary must be under the state and trust rules. Assuming you are the child’s legal guardian, the money in a custodial account is counted as part of your taxable estate until the child reaches the legal age to control the trust, but the income earned from the trust is reported and taxed on the child’s return. These accounts can affect financial aid awards when students apply to college, and therefore, it can be beneficial to transfer the proceeds to a 529 account.
Tax benefits of a custodial account include (for children under 19) the first $1,000 of unearned income tax-free, next $1,000 of unearned income taxed at the child’s rate, and any unearned income over $2,000 taxed at the parents’ tax rate. Although many experts disagree about whether or not parents should put the entirety of their children’s college funds into custodial accounts, even if you decide to invest in stocks or use a 529, custodial accounts can be helpful for saving money for anticipated college costs that are not covered by 529 plans.
4. Take a Look at the Local Community College
Community colleges don’t have the negative stigma that they used to. Many community colleges have excellent reputations and can save parents and students a lot of money. Four-year state colleges cost almost three times a community college education, and of course private educations cost much more. In addition, by living at home, students will save money on food and board.
Students who crave a prestigious name on their diploma, or simply want a four-year degree to compete in their field can always transfer after two years at a community college. Although many students fear they won’t be able to transfer to a good school, four-year schools will certainly not look down on students who complete their basic core requirements at a community college. Many students actually flourish at community colleges, and then transfer to four-year schools with a high GPA and a much clearer vision of what they want to do with their life.
5. If You Are Facing Crunch Time
If your child is headed to college soon and you haven’t saved anything yet, you can also consider using your IRA. There is no tax penalty for IRA withdrawals on qualifying educational expenses. A 401K is a different story, as you will most likely suffer a 10 percent penalty. Another option could be using your home equity line of credit. If it is too late to save, your home equity could be an inexpensive way to help your child pay for college. Of course, a major downfall of using your IRA, 401K, or home equity is that doing so could be detrimental to your retirement savings.
That brings us back to our first consideration: making a long-term budget. The earlier you start with a budget, a plan, and a goal, the better prepared you can be to budget regular contributions toward educational expenses and to use tax advantaged plans to help the college fund grow.