Most kids go to college these days, and end up overloaded with student loan debt, so here are some strategies for parents to help them start saving for education expenses. In today’s job market, a college degree is in many ways what a high school diploma used to be. College can be a financial worry for students and parents alike, with already astronomical costs being compounded with yearly inflation.
General Saving Tips
Starting early is crucial: start saving a small portion of your income as soon as your child is born and gradually increase it as they approach their senior year. Automating your savings is the easiest way of doing this. You can adapt your savings goals as your financial situation changes, but it’s best to keep a steady rate, even if it’s only 0.01% of earnings. It’s wise to have equal saving goals for all of your children, as you often won’t know until later in high school who will be suited for college. Prioritize your finances (e.g. pay off your other debts and avoid amassing poor credit) and reevaluate your saving strategy once a month, quarter or year.
Getting Them Involved
College saving should be a team effort: it’s their education after all. Motivating your children in high school, such as helping with homework, helping them apply for scholarships or considering tutorship can teach them self-reliance and take a load off you. Teach them about student loans and how you manage to keep track of your financial deadlines: a financial education is invaluable in later life and will be especially helpful during their college years. You can further this education by setting them up with a savings account for allowance and part time work money, or a credit card with spending limits if they’re responsible enough.
College Saving Plans
Consider different saving plans: 529 college savings plans are offered in more than 30 states and are tax free, however if you don’t use it for eligible expenses (e.g. tuition and books) its earnings will be taxed and you’ll be faced with a 10% penalty. If you set up a trust, you decide ahead of time how the funds are allocated and when they can be accessed, but trusts require the legal hassle of hiring an attorney and selecting a trustee.
UTMA/UGMA accounts can be spent on anything “for the use and benefit of the minor” – such as cars or accommodation and are accessible by the age of 18 or 21 depending on your state, but offer fewer tax benefits than 529 plans and may affect the amount of federal aid your child is qualified for under FAFSA because it is considered your child’s asset.
Roth IRA accounts are tax free after a five year wait, which is helpful since it can still be used even if your child doesn’t end up going to college. There are, however, income limits ($129k for a single contributor and $191k for a married couple) and contribution limits ($5.5k per year or 6.5k if you’re over 50 years old). Coverdell education savings accounts can be used to pay any educational expenses, from K-12 to college, but can only be contributed 2k per child per year and are inaccessible to a single person earning greater than 95k or couple earning more than 190k a year. Funds not used by the time your child is 30 may be taxed.
If you’re short on contributions, or on the other hand, if you know friends or relatives with poor credit ratings, they can secure personal loans at services like KingofKash.com/personal-loans/ in order to contribute.
Other Programs to Help Fund Your Child’s Education
Several alternatives remain. Fidelity Rewards schemes earn a cash back from a percentage of your purchases, which is deposited into a Fidelity -managed 529 savings account. Visa offers a Fidelity Investment Rewards Signature Card which earns 1.5% of the first $15k spent per year and 2% after that.
American Express offers a similar card which earns 2% cash back on every purchase provided you direct your deposit into your Fidelity 529 account. Other family members can also link their card rewards to the scheme by linking it to your Fidelity-linked account. Gift of College allows family members and friends to directly gift your 529 savings account at the cost of a 5% processing fee.
Upromise earns cash back on college shopping and dining by linking your online shopping, credit, loyalty and grocery cards to a 529 savings account.
There’s never a bad time to begin planning, getting your child involved and considering different saving plans. Talk to friends, colleagues and extended family with experience in college saving to get several opinions to guide your research.
Lucas Allan is a parent who writes about personal finance topics in his articles. Offering up tips and tricks for saving more, spending less and even earning a bit extra, his articles appear at a variety of personal finance and parenting blogs.