Every family recognizes the importance of a strong college education. Parents constantly encourage their children to perform competitively in high school and obtain a suitable college education as to maximize their chances of success in the workplace. However, more and more parents today are neglecting the importance of funding said college education.
Over the past thirty years, tuition fees for both public and private colleges have seen a monumental rise. According to CNBC, the average public-school tuition has increased 213% to approximately $10,000/year. Private-schools have seen a markup of 163% leading to an average cost of $34,740/year. Keep in mind, these prices just account for tuition. The cost of room and board, textbooks, and other living expenses further exacerbate the situation. In fact, the exorbitant costs of attendance cause 71% of students to graduate with student debt – an average of $25,550 for public schools and $32,300 for private organizations.
Getting a head start on a college savings plan is essential because a lack of funding can severely limit the options for your child when applying to and choosing between universities. Furthermore, student debt can hinder a graduate’s ability to invest in both their current and future selves.
Here are a few tips to get started on a college savings plan that works for you!
There are numerous instruments established by both federal and private institutions to aid in the process of saving for college:
- Roth IRA’s
A Roth IRA is considered by most to be a retirement account, but many do consider it a valuable part of a college savings plan. Via a Roth IRA, you can essentially contribute money from your net income or other capital gains to a tax-advantaged account and withdraw the money after age 59-1/2. However, the relevant perk of a Roth IRA is that you can withdraw your contributions after a five-year period for certain expenses such as education fees or home payments. However, high income families are not eligible and there is a contribution limit, which is why a Roth IRA isn’t the most popular option for families saving for college.
- 529 College Savings Plans
The 529 Plan is considered, by far, the most popular option for families in the United States. Much like a Roth IRA, individuals can allow their investments to grow tax-free. Unlike a Roth IRA 529 plans allow individuals to withdraw money from educational expenses at any time and without facing contribution limits. Plans are offered by each state and a common misconception is that members must choose a plan from their state of residency. Parents have the ability to choose from a plethora of plans and select one which provides superior tax benefits and suits the family’s desired level of contribution.
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- Prepaid College Savings Plans
A few states also offer prepaid college tuition plans. These plans, though much less common, are essentially 529 plans, but with one major advantage. These plans allow you to pay tuition for all or part of an in-state public tuition, given the present-day tuition fees. Such plans are great tools to guard against ever-increasing tuition fees. Click here to see if your state offers a prepaid college tuition plan.
If you don’t have enough assets to contribute sufficiently
Of course, there are some families who genuinely can’t afford to put aside a substantial sum for their child’s college education. However, this does not mean that their children don’t deserve a quality education! Here are some ways to ensure that your child receives a quality education even if you can’t contribute large sums to college savings plans.
- Encourage academic excellence early on
As mentioned earlier, a college education can be the single most important asset a potential member of the workforce can have. Motivating your children to maintain stellar grades throughout their academic careers, primarily high school, can greatly increase their ability to qualify for scholarships. In addition to school, motivate your children to prepare for standardized exams and to pursue volunteering and community outreach opportunities as these also increase the likelihood of scholarship awards.
- Suggest a part-time job
I think that the sooner children learn to take responsibility for themselves the better. Getting a part-time job does just that! As soon your children are able to work, encourage them to find a job. Working from an early age not only shows a strong work-ethic to college admissions offices, but it also develops the crucial skill of time management. Most importantly however, a part-time job allows students to save for their own college education and to gain financial accountability.
- Discuss the possibility of student loans
Unfortunately, for many college graduates, student debt is an inevitability. If you know you won’t be able to fully fund your child’s education, teach them the financial groundwork of student loans. Discuss how much your child might have to take out in student loans, what the interest rates would be, how the payments would be structured, and how long it would take them to settle the loan. Make sure you and your child are comfortable with the details.
A few general tips
- Start Early
If your kids are young and you think you have enough time to catch up on saving up for college, you’re probably wrong. In fact, Vanguard estimates that in 18 years the price tag for a four-year private college education could be up to $500,000! That’s means the cost of tuition is growing more than twice as fast as the rate of inflation! Make it easier for yourself; start now.
- Contribute Regularly
Many parents make the all-too-common mistake of only contributing to college savings when they have some extra cash on hand. However, if you can afford it, college savings should be a fixed expense. The most common solution to this problem is to automate your contributions. Simply set up an automated deduction from your checking account each month to be contributed to a 529 or Roth IRA account.
All in all, saving for college is as crucial an expense as most. If you can afford to contribute funds regularly towards your child’s education, start by choosing a suitable savings plan such as 529 or a Roth IRA. If you can’t contribute sufficiently, motivate your child do perform well academically and educate them about the benefits of scholarships. You should also encourage your children to work part-time and discuss the possibility of student loans, if the need arises. Most importantly though, start early!
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