Where To Save For College
For many people, the easiest and most convenient way to put money aside for college is through a state-administered 529 college savings plan, also known as a qualified tuition program. The money you deposit in a 529 college savings plan grows free from federal income tax, and your withdrawals are also tax-free as long as you use them for qualified higher education expenses, such as tuition and room and board.
Another type of 529, a prepaid tuition program, covers tuition but usually not room and board. Many states also provide for tax-deferred growth and tax-free withdrawals, as well as allowing a state tax deduction for the money you contribute, up to certain limits.
There are no limits on how much money you can add to a 529 plan each year, although many states do set limits on total contributions. Recently those ranged from $235,000 to over $500,000which, for people who can afford to save that much, could be ample to cover just about any four-year degree.
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How Much Of The Bill Do Parents Plan To Pay
Findings from Fidelity Investments’ 2020 College Savings Indicator Study5 also reveal that although many parents plan to pay the total cost of college and are increasingly on track, they need to start saving earlier: Fewer parents are starting to save before their child reaches the age of 233%, down from 37% in 2018but are on track to meet 33% of their college funding goals. The good news: This important college savings indicator is up from 28% in 2018.
Weve seen the percentage of costs parents intend to cover grow over the past several years, even as college costs continue to climb. Parents want to help minimize the burden of potential student loans, explains Rita Assaf, vice president, Retirement and College Leadership at Fidelity Investments. Despite these good intentions, fewer families today can realistically reach these lofty savings goals.
Any way you look at it, parents are on the hook to pay the lions share of college expenses. To keep things simple, our 2K rule of thumb methodology assumes that parents, on average, are expecting to cover 50% of college costs from savings. Thats the starting point for our college savings calculator. Your own situation might vary, so weve added the flexibility to let you input the percentage of college expenses that you expect to pay from savings.
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Simple Rules For Saving Money
Each state has its own 529 program and its financial firm to manage them, and the fees can vary. Some charge just 0.1% or 0.2% in fees. You can choose any state plan you want not just the plan in your state. A website called Savingforcollege.com can help you find a good plan.
While a 1% or 2% fee sounds small, remember that it’s a fee charged against your return. So if you’re getting a 4% annual return, a 1% fee takes a full quarter of that return away.
That seemingly small fee would substantially slow down the amount of growth in your portfolio, Gibson says. That said, some states will give you an extra income tax break if you invest in the state 529 plan where you live, Gibson says, so find out if your state offers that tax break and factor that into your decision.
6. Setting up a 529 plan creates an easy way for friends and family to kick in money to help you save for college.
Listener Phil Cunningham did this before his child was even born. The Washington, D.C., resident made a request for the baby shower.
“Look, we don’t need a lot of onesies, we have a high chair. Please, don’t buy us stuff,” Cunningham told guests. “What we really, really, really would appreciate is if you just put in 10-20-50 bucks, whatever you can, into the 529 account.”
Singletary says states like Maryland offer webpages that parents can set up and even add a photo of their child so that others can contribute.
Breaking Down The Process: How A 529 Affects Financial Aid
You fill out a FAFSA form, providing information about your financial situation.
Administrators calculate your expected family contribution, which is how much youâll have to pay out of pocket.
Depending on your age, youâll have an asset protection allowance, which is a certain amount of savings that donât get factored into the formula . For the 2021-2022 school year, the amount for a two-parent home was $5,500 if youâre 40 when your child goes to college, up to $10,500 if youâre 65 or older.
Money in retirement accounts also doesnât count, which is good news for you.
The rest of your savings are assessed at up to 5.64 percent, including money in any 529 plans. So, if youâve saved $10,000 above and beyond your asset protection allowance, your financial aid package would only get dinged by up to $564.
Anyone telling you that a 529 education savings account will hurt you is essentially saying, âDonât bother saving $100, because youâll only get to use about $95.â
One important caveat: Encourage grandparents to contribute to a 529 plan you open, rather than creating their own. Funds from separate 529s will look like âstudent incomeâ and take a much bigger bite out of your financial aid.
What you can do today: Decide on a basic savings goal. Even if it isnât sky-high, think about what you can afford and make a commitment to contribute that much each month. Bonus points? Set it up through autopay so you know youâll do it, no matter what.
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Not Coordinating With Relatives Can Lead To Over
Whether you can comfortably afford the cost of college or are getting behind on your savings plan, consider coordinating efforts with grandparents and relatives. There’s more than one way to save too much for your kids college. Grandparents, aunts, uncles, and other relatives may have set up their own 529 plan for your child or are putting money aside in a brokerage account to help with the cost. If family members aren’t aware of your savings strategy, it’s possible to save too much.
Alternatively, if you’re saving too much for college given your financial means, consider asking for help. Families don’t typically discuss financial matters, but if you don’t communicate your needs, you’re not giving anyone the opportunity to pitch in. There are several reasons family wouldn’t initiate the discussion. The most obvious: they can’t afford to contribute. But perhaps they didn’t want to over-step, didn’t know how they could help, or even that you needed it.
How to fix it
You may be saving too much for your kids’ college if they don’t have any skin in the game
Parents can pay for college, but they won’t be there to ensure their student is taking advantage of the opportunity. Without a firm grasp on the expense and sacrifice to make it possible, it’s easier for kids to take college less seriously. But if the student has a stake in it, they’re more likely to make choices that further their own interests.
How to fix it
Do You Want Your Child To Take Some Responsibility
Sometimes parents can afford to pay for a childs entire tuition but decide they dont want to do so because they want their child to work for their degree. While its unrealistic to expect that your child can fund college with a part-time job, you could make clear your son or daughter will be responsible for a certain percentage of expenses.
If you want your child to have some financial responsibility, you could offer a low-interest loan — but get the details in writing. Some parents will also have their kids take out the actual loans, but the parents will agree to pay them back if the child graduates on time with a certain GPA. Only you can decide what works for your family and how comfortable you are with giving your child a fully paid for education if you can afford to do so.
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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 Much Do I Need To Save
Many parents are in a very tight cash flow situation in the first few years of a childs life, as they are often going from two incomes to one income, said financial planner Julia Chung. The savings need to be reasonable given the individual situation.
The Scotiabank survey found that parents and guardians in Atlantic Canada estimated the average total cost of a post-secondary education for their child, including tuition fees, housing, and other expenses, will be a whopping $110,435 while those in Quebec say they estimate the cost will only amount to $33,738.
Moran said how much parents or guardians need to save these days in order to be able to afford a post-secondary education for their child really depends on several factors.
Some of these factors include:
- Where will the child attend post-secondary school? Note: tuition fees vary from province to province
- What type of post-secondary institution the child will attend?
- How long they will attend?
- Will the child live at home while they study?
- How will tuition costs change?
While experts say its difficult to say how much a child should have in the bank at the start of post-secondary, online resources, like this RESP savings calculator, give parents a rough idea of how much an education might cost.
The tool allows you to choose the province of study, the number of years your child is expected to study, the current tuition value and whether the child will live away from home.
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Kids’ College Vs Saving For Retirement: Which Way Do Parents Go
With the cost of tuition soaring, many say they would tap into their retirement funds to pay for it.
More than 90 percent of parents are saving for their childs college education or would like to start doing so. With the cost of tuition soaring, many are making savings a top priority and even are willing to tap into their retirement funds to pay for it.
Student Loan Hero recently surveyed more than 1,000 parents with children younger than 18. The survey found that most parents are taking proactive steps to make college education a reality for their children.
Using The College Education Savings Calculator
Our calculator can help you determine how much to save for your kids college. The savings is more important than you might realize. If you have kids now, even state schools will likely cost more than $100,000 by the time they are ready to graduate from high school. While loans and scholarships are an option, your children may not qualify for enough of both to get them through school. And trying to fund an entire higher education with loans can result in your kids starting their working lives with unreasonable debt levels. In addition to using our calculator, consider the following questions as you start to save for your childs degree:
- How much time do I have? The sooner you start saving, the more time you have to take advantage of compound interest, and the less money you will need to put aside each month.
- How will I be investing? A 529 account is designed specifically to help you save for college. Consider these and other savings and investment vehicles to see which ones help you save the most with the best tax advantages and interest rates.
Be sure to use the calculators at Money Help Center to gain control of your household budget. Our free calculators may help you find ways to save more for school.
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Paying For College: What To Know Before You Go
“So thinking that you would be better off if you just didn’t have that $1,000 doesn’t make any sense at all,” Baum says. “It’s a lot better to have the $1,000 than it is to have the $56 that the financial aid system would say you could get.”
If you save a substantial amount, say $20,000, your expected contribution would go up to $1,100 and you’d have that $20,000 to help pay for your child’s education On top of that, a college may not have the resources to give you all the financial aid you could qualify for, so you might not get any less financial aid at all as a result of saving up a pile of money.
“You’re much better off having saved the money,” says Baum.
She recommends using a 529 plan, an investment account specifically made to save for college. You don’t have to pay taxes on the gains you earn in the account if you spend the money on education. Most plans will set up an appropriate mix of investments for the account based on the age of your child.
If you start early enough, the money you invest could easily double by the time your kid goes to college.
2. Prioritize saving for your own retirement ahead of saving for your children’s college but still, save for both.
“It’s not an either-or situation,” says financial columnist Michelle Singletary. “You’ve got to do both.”
3. Start saving something even if you can’t save the full amount.
Don’t get overwhelmed and defeated if it seems impossible. Start small.
4. The best way to save money is to make it automatic.
Qualifying Us Savings Bonds
U.S. savings bonds are federal tax-deferred and state tax-free if held until maturity. Maturity is 20 years after the bond is issued. Your return will be roughly 3.5% per year for the most common type of savings bond, type EE.
If you redeem the EE bond early, before the 20th year, your return will average just 0.1%, and you will incur a penalty of 3 month’s interest if the bond is less than 5 years old.
If you purchase type EE bonds for college, you’ll need to do so before your child is born to earn the maximum benefits at the 20-year mark. Otherwise, your child will need to defer college until the bond has matured.
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Start Saving For Your Childs College Early
Ideally, the best time to start a college fund is when your child is born. With compound interest and regular investments made monthly or yearly, the funds have an opportunity to grow over a longer period of time, and you dont need to put aside as much each month or year to reach your savings goal.
Your funding can be modest, and many parents find they can afford $25$100 from each paycheck, automatically deposited into the college savings plan of their choice. If you get a raise or bonus, that money can also be allocated toward college savings.
Family members can contribute to a child’s college savings by opening their own 529 plan accounts. They can also make contributions to an established 529 account under the child’s parents’ name, if the plan that the parents use accepts third-party contributions.
Some plans don’t accept these contributions, in which case it’s best to create a new account or gift the parents cash intended for deposit into the 529 plan. Regardless of how the plan is set up, its important to maintain contribution levels that will ensure you can afford tuition and other costs. Such discipline can be particularly useful if you face additional financial obligations later.
No matter what plan you choose, starting a college savings fund for your child is a big investment. Let a Nationwide financial professional help guide the process.
The Rule Of 10 Formula
This is an easy-to-remember formula that the Lumina Foundation developed. The Rule of 10 suggests that:
- Families save 10% of their discretionary income
- Families do this for a period of 10 years
- Students work 10 hours a week while in college
Discretionary income is usually defined as your after-tax income after all your basic expenses and financial obligations are handled. These priorities should also include your own retirement.
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Potential 529 State Tax Benefits
Some states offer a tax deduction for contributions to a 529 plan, which could further increase projected college savings if tax benefits are invested. Read more about state tax benefits for 529 plans, and estimate your state tax savings with our Tax 529 Calculator.
The amount of scholarships and grants the student can expect to receive is based on your household income.
Maximum assumed rate of return is 12%.
The amount of scholarships and grants the student can expect to receive is based on your household income.
Also called “sticker price”, this is the projected future cost including tuition, room & board, books and fees.
Costs not covered by savings will need to be paid in the form of current income, friends/family contributions or student loans.
This is the average amount of money a family typically receives in financial assistance.
Based on your monthly contribution, this is how much you’re expected to save in a 529 college savings plan.
According to the Department of Education, most students take five years or more to earn a bachelors degree.