Wednesday, October 5, 2022

How Much Money Should You Save For Your Child’s College

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Consider Getting Professional Help To Pay For College

How much you need to save every month to send your child to NYU

No matter where you are on the college savings journey, making sure youre in a financial position to save money for college is key. If you have credit card debt, you may want to consider , which can help you create a budget to start putting money away for your childs college education. A nonprofit credit counseling agency also could provide a debt management program, to reduce your debt and make saving easier.

Invest Your Savings Tax

Nearly 7 in 10 parents arent familiar with a 529 college savings plan and they should be.

Putting it simply, a 529 college savings plan can help your savings go further. Its a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their childs college savings. Its not just for grandparents!

Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments and becomes more conservative as your child approaches college. This means your money grows over time, but youre also reducing risk as it becomes time to pay for college.

What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. Thats a big difference!

There are a lot of 529 plan options, but investing doesnt have to be complicated. Here are a few guidelines in case youre doing the research yourself:

How To Save For College

There are almost as many types of accounts to help save for college as there are types of colleges to save for. Which account is best depends largely on a savers financial situation, how much they want to save, and how much theyre able to save.

Here are some of the most common and effective ways to save for college.

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Should You Pay For Kids College

So as the numbers above show, the cost for college is high, and its rising. Should parents feel obligated to help their children cover the cost of their education? According to a survey released this week by Discover Student Loans, more parents are saying no.

more parents are saying no when it comes to helping their kids pay off student loans.While 58% of parents in 2013 said they were very likely or somewhat likely to help out with student loan payments, just 52% said that this year the lowest percentage since the survey began three years ago the national survey was of 1,000 adults with teens planning to attend college.

Granted, over half still say they would help, but less parents are saying that they will help their kids with student loan payments. Is the reason that they arent helping because they dont want to, or because they just cant? Helping Out Is A Good Idea, But Consider Your Own Retirement First Helping out with your childs education costs is a great idea, but many parents in age groups with teenage kids in the U.S. have saved far too little for their own retirement:

Where Should You Save For College

How much pocket money should you give your child?

So how can you save for your childs education? There are a lot of good ways to that.

  • 10% early distribution penalty is waived for college expenses.
  • Contributions always available.
  • Roth IRA value not considered for financial aid.
  • You still have the money if child doesnt go to college.
  • The 529 and Roth IRA are the two main ways that I would save for education here in the United States. In Canada you may want to consider an RESP.

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    Figuring Your Own Cost

    What your own net price is will depend on a number of factors, particularly your family income. When it comes time to start applying to colleges, youll want to fill out the U.S. Department of Educations Free Application for Federal Student Aid . The FAFSA is used to determine your eligibility for federal aid as well as to apply for it. If you arent at that stage yet, the department also has an online tool called the FAFSA4caster that you can use to see how much federal aid you might expect.

    If it appears that youre eligible for federal aid, the departments College Scorecard provides average annual cost data for specific colleges and universities, based on each schools COA minus average grants and scholarships for federal financial aid recipients. If you aren’t eligible for federal aid, your net cost will be closer to the school’s COA.

    But even if you don’t receive federal aid, you may not have to pay the college’s full, published cost. Another important cost factor is the college itself. In a classic illustration of supply and demand, schools that can afford to turn away large numbers of applicants are less likely to discount their tuition than those that are struggling to keep their lecture halls full.

    Any number you arrive at will be a guess, of course, and the farther off college is, the more of a guess it will be. But at least its an educated guess.

    If a student takes more than four years to graduateas many now docollege can become even more costly.

    How Much Should You Really Save For College

    Jeff Rose, CFP® | September 07, 2021

    A major goal for most parents is to see their children graduate from college and receive a good job so that they can live a long and fruitful life. The recent financial fiascos of the United States have put a strain on the ability of government to contribute to the ever increasing costs of college.

    Historically college costs have inflated at around 5-8 percent annually, with some long periods of inflation over 8 percent. This could pose a major problem when your average investment return will be in the range of 7% annually based off the historical returns of the S& P 500. This sounds overwhelming at first, but starting to save early is crucial to your success. From the day your child is born you will have approximately 18 years to be ready for the day your son or daughter is ready for college, but the question is, how much should you save? This whole question become even more apparent in my life as we just welcome our third son into the world. Can you say, college tuition x 3 = Big Bucks?..Yikes! I know many other parents are in that same situation so I thought it would be best to help them figure out how much to really save for college.

    There isnt a right answer. Youll have to figure that out on your own. What the numbers below will help you figure out is a ballpark figure on how much damage youll be looking at. If youre not sitting down yet, maybe you should..

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    Paying Your Kids Tuition Bill

    When you look at the examples above, the only thing that you can control is the year which you start saving. You will most likely not be able to determine a higher return for your portfolio, and should not be relying on this to pay for your childs education. Of course the simulations above also have the expectation that you will be paying for 100% of your childs tuition, when in reality the majority of students graduate with some type of college loans. If you were to only pay for say 78% of your childs college costs, you would need to save significantly less than the figures above. The key takeaway from this information is that the earlier you start saving for your childs education, the better off they will be in their adult lives, and the more debt free they will be.

    College Saving: Part Of Your Overall Financial Planning

    When Should You Start Saving For Your Kids College?

    Once you have a sense of your college savings needs, make sure you are investing the money appropriately. Among several available college savings options, a great place to start is to open and contribute to a 529 college savings plan account. Its popular with parents and grandparents alike because there are few restrictions and the benefits are plentiful. You can potentially reduce your taxes, and retain control over how and when you spend down the money.

    As you watch your kids grow up and get ready to leave the nest, remember that staying invested appropriately is key, says Assaf. 529 plans often include age-based investment options that potentially help you stay on track. These investment options automatically shift your investment mix from more aggressive to more conservative as your child approaches college age. That can help mitigate the effects of a market downturn by moving the portfolio to a more conservative asset allocation soon before those tuition bills start to hit your inbox.

    Tip: Public and private college costs can vary greatly by location. For public colleges and universities, your state of residence is one of the most influential cost factors. If you find that your savings are not on track, widen your search and consider applying to less expensive colleges or those known for providing generous aid or merit scholarships.

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    How Much Should You Have In A 529 Plan By Age

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    The 529 College Savings Plan is one of the best ways to save for college. But most people aren’t taking full advantage of them. And I’m not going to lie – I’m one of them.

    So let’s dive in and see how much you should have in a 529 plan.

    Every Family Has Different Savings Goals

    Our 2K rule of thumb is an easy way to see whether you are on track, especially if your children are still young and you are not sure where they will ultimately choose to go to college, says Andrey Lyalko, a vice president at Fidelity. Because this approach may not apply to all situations, make sure to develop a robust college savings plan and be mindful that college costs are a variable that can dramatically change over time.

    So what if your situation differs from the norm? Perhaps you are hoping for a sports scholarship for your aspiring student athlete. Or maybe you are looking to cover 100% of college costs and are not expecting any scholarships or grants. You may also believe that your child will go to a private college, where the costs could be substantially more than the average public university.

    The college savings math can still work for you:

  • Simply determine how much a target college, or type of college, costs annually in todays dollars, and multiply those costs by the percentage you plan to cover from savings. This gives you the annual amount you intend to cover from savings.
  • Now apply the 2 for 10 concept. For every $10,000 you will cover per year, multiply your childs age by $2,000.
  • Or try the college savings calculator yourself, which does the math for you.
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    Consider Helping But Have Your Kids Put Some Skin In The Game

    If youre in a position where you are saving for retirement and youre on track, you may want to consider helping your kids fund their education. There are good reasons to have your kids pay for at least a portion of their schooling, however. One study by Laura Hamilton, assistant professor of sociology at the University of California, Merced, found that kids that had their schooling completely paid for did worse in school!

    kids GPAs actually dropped when parents were footing the bill for college. I call it satisficingin other words, kids were doing just enough to stay in school. They dialed down the academic effort, and did less than other students who were paying part or all of their own way. When parents fund your education, its a no-strings-attached situation. Kids are completely in the dark about what theyre receiving, and how expensive it is. Parents also dont tell kids what they have to do to keep receiving it, and since paying for college makes it possible for students to spend a lot more time on the social scene, theres no motivating factor to make them focus on academics.

    Question : How Many Kids Do You Have

    How Much Should You Save For Your Child

    If you have or plan to have more than one child, you need to think about all of them when planning for college. Otherwise, you risk stretching yourself thin to set aside college savings for your first child, only to find theres nothing left when the second kid comes along.

    Figure out how much you can reasonably afford to put aside each month for college savings, then divide that up fairly among all your children. If that leaves only a small amount for each one, its better to know that up front so youll have the right budget in mind when its time to start looking at colleges.

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    Question : What Are Your Childs Career Plans

    Even if youve already saved up money to send your kids to college, that doesnt necessarily mean it makes sense to spend it that way. College is only a good investment if your kids will use that degree to pursue a career where it really makes a difference.

    A college degree is a bigger advantage in some fields than in others. Health care jobs, such as pharmacy and nursing, have lots of job openings for new graduates. Engineering and agriculture majors, and some education majors, are also likely to get good jobs, according to Kiplinger.

    But other majors, such as literature and the arts, dont offer a clear route to a high-paying job. Your child could spend four years at college only to end up working in retail anyway. If your child is passionate about art, perhaps they could redirect that passion into a more lucrative field like art education. However, if they wont even consider a degree that could pay for itself, maybe college isnt a good investment.

    Remember, too, that some careers dont require a degree. If your child is drawn toward hands-on work, such as auto repair, maybe a trade school or an apprenticeship would be a better value. A military career can start right after high school or with a free education at one of the service academies.

    Why Save For Your Child’s Future

    If you’re like most parents, you want your child to go to college. At the same time, paying for college is probably one of your biggest financial concerns.

    Don’t think you can do that? Here are some of the more common reasons parents don’t save for college. But options are available.

    “I don’t have any money to save.”

    Too often this is true. If you live paycheck to paycheck, you may not have any money to save toward future college expenses.

    But take a closer look at your expenses. You may be able to “find” money to save just by adjusting some priorities. For example:

    • Put some extra money in your pocket by canceling subscriptions to magazines that you never get around to reading.
    • Brown-bag it instead of eating out for lunch a few days a week, and you can “find” an extra $50 each month!

    Add it up, and all of a sudden you have the means to start a college fund. Sometimes you just need to make savings a priority and come up with a plan.

    Can you think of some changes your family could make?

    “I don’t know where to invest money for college.”

    If you have questions about investing, consult your personal tax advisor or a financial service provider for recommendations. Also discuss the following options:

    “My child will get scholarships, so I don’t need to save for college.”

    “If I save for college, my child won’t be eligible for student aid.”

    This may be the biggest myth of all. Many parents believe that having money in the bank will prevent their child from receiving student aid.

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    Saving Too Much In A 529 Plan Is An Expensive Mistake

    529 plans are a great way to save for college. Money is invested and withdrawn tax-free if spent on qualified educational expenses. But if your savings exceed the cost, you may have to pay tax plus a 10% penalty on what’s leftover. Given the uncertainty of college costs and investment returns, trying to cover exactly 100% of expenses with a 529 plan is practically impossible. Sure, your kid may decide to continue their education after graduation…but how many seven-year-olds really know they’re going to become a doctor? And saving any amount for college before having children is too much.

    Like retirement accounts, 529 plans have tax advantages. But qualified accounts effectively lock the money up, forcing you to pay a penalty if you need it for something else other than education.

    How to fix it

    • Consider funding your kids’ 529 plan with no more than 75% of the savings goal. Pay for the rest by investing the rest in a flexible brokerage account or out of cash flow.
    • If you’ve already saved too much, you still have options. When your child finishes college, you can name a new beneficiary, such as another child or a relative. If the graduate is considering an advanced degree, you may want to take a wait-and-see approach. In the event an older child took out student loans, up to $10,000 from a 529 plan can go towards repayment.
    • Sending your child to private school? You may be able to use up to $10,000/year to pay tuition for K-12 education.

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