3 minute read
It's important to have a college savings plan in place, no matter your budget.
- It is never too early for kids to save for college
- Research 529 plans
- Talk to your tax advisor
College may seem to be in the very distant future, but it is never too early to begin saving. Start by becoming aware of the cost of college. While you may feel confident about paying for the tuition at a local junior college, the annual cost of a private 4 year college may seem overwhelming(1).
Here are some examples of basic costs:
- $37,650+ at private colleges
- $10,560+ at public colleges (in-state residents)
- $27,020+ at public colleges (out-of-state residents)
Prices tend to rise rather than decline, so use this knowledge to start your savings plan.
Remember that if you start early, time is on your side. The earlier you contribute to a college fund the less you will need to save each month to reach your goal. Studies show that simply opening a dedicated college savings fund, even with a small amount, encourages future contributions. It also encourages your child to further their education beyond high school(2). Get kids started with the habit of setting goals and saving with Family Money. By giving kids an allowance and using the prepaid debit card, your child learns to work towards their goals and identifies opportunities to save.
It may also be beneficial to do some research on 529 plans. A 529 plan is a tax-advantaged savings account designed to be used for the beneficiary's education expenses. The money in a 529 may be used for a wide range of educational expenses including college expenses, K–12 tuition, certain apprenticeship costs, and even student loan repayments. It is important to do your due diligence because not every 529 plan is the same and they vary from state to state. More than 6,000 U.S. colleges and universities and more than 400 foreign colleges and universities accept the plan, but you should check to see if the program is eligible under 529 rules (3). As always before making any investment it is essential to speak to your financial advisor.
Every family has different financial circumstances and may not be able to set aside a percentage of a salary for a child’s college education. If parents are paying off a mountain of credit card debt, there may not be much left to prioritize college savings. It is important for families to save what they can afford. Try using the Lumina Foundation’s Rule of 10 formula(4).
This benchmark was originally designed for colleges to provide better access to higher education but can be used by families saving for college. This formula suggests that families save for college using the benchmarks:
- Families save 10% of their discretionary income
- Families save over a period of 10 years
- Students work 10 hours per week while attending college
Ultimately there is no hard and fast rule for setting aside funds for college. How families pay for higher education is as diverse as the families themselves. It is usually a combination of savings, grants, loans, investments, scholarships, and work-study programs. The most important thing is to start the conversation about saving today and speak to your financial advisor about your individual situation. Remember, graduation day is right around the corner.
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