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How To Save For Your Child’s College

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Additional Ways To Save Money For College

Saving for Your Child’s College Education

Sticking with college, here are additional ways to save that you and your child can work toward. Whether youre a new parent or a year out from sending your kid off to college, consider these opportunities to save money.

And, mom and dad, when the time comes, make sure you fill out the Free Application for Student Aid .

Keep Major Account Balances In Your Name

While its okay for your teenage daughter or son to have a savings account in her or his name, youll want to make sure that account balance stays under $3,000. Any more than that and your child risks losing out on financial aid for having too much money. Should you encounter this scenario, youll want to leave accounts with serious numbers in your name. Your child will thank you later, and youre sure to thank yourself later as well.

Ways To Save For Your Childs College Education

If youre a new parent, it might feel as though there arent enough hours in a day. Saving for your childs education, though, is one area in which time is on your side.Over the past decade, the average published tuition and fees at public four-year schools have risen 42%, adjusted for inflation, and you can bet that costs will keep going up. But you can get ahead of those rising costs by starting to save when your children are very young.A big part of saving enough for college is knowing where to save the money. Here are some popular options.

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Are You Saving Too Much For Your Kids College

Whether you’re over-funding a 529 plan or prioritizing college savings over your own financial … security, saving too much for college can be costly.


With the average cost of college nearing $33,000 per year, few parents have concerns about saving too much for their kids’ college. But that doesn’t mean they shouldn’t be. Whether you’re over-funding a 529 plan and risk incurring taxes and penalties or prioritizing college savings over your own financial security, saving too much for college can be costly. Here’s how to tell if you’re saving too much for your kids’ college and what you can do about it.

How Much To Save

15 Creative Ways to Save &  Pay for Your Kids College ...

Financial experts suggest a starting point of saving $2,000 a year if you use a 529 savings account. With this approach, you could save half of the anticipated cost of a four-year college degree.

Cost-related considerations include location, the college, and if a student qualifies for in-state tuition rates. Whether a student plans to attend college part time or full time also influences expenses. Other considerations include costs for books, lab fees, room and board, and commuting if a student resides off campus.

With so many options, costs vary considerably. For example, tuition at Tidewater Community College, a two-year school in Virginia, costs $185.35 per credit hour, or about $5,560 per year for an in-state student taking 15 credits per semester. In contrast, annual undergraduate in-state tuition at William & Mary cost $17,434 for the 2021-2022 school year. However, with books, fees, and room and board included, the cost rose to $40,220.

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Open A 529 College Savings Account

A 529 college savings account allows you to save for your childs educational needs without incurring taxes on the investment gains. In some states, they offer additional tax benefits, allowing you to deduct contributions from your taxes. Using a 529 plan is easy once you know the basics. Within a 529, you can choose from a variety of investments, though most accounts offer a straightforward target investment plan that optimizes investments for you based on a high school graduation date. Using a 529 when its college time is easy, too your college or university will work directly with the plan. A 529 is the best all-around option for most people.

Should Parents Dip Into Their Retirement Savings

Parents who can’t take out loans, or who need additional funds to help pay for their child’s education, may consider dipping into their retirement savings. In fact, 9% of parents in our survey said they planned on dipping into a 401 or other retirement savings to help pay for their child’s education, while 14% said they were considering it.

While needing the extra funds is understandable, it is usually inadvisable to withdraw from your retirement savings. The main reason, of course, is that these funds are needed for your retirement and are hard or impossible to recoup. There are also early withdrawal penalties and deferred taxes on funds withdrawn before retirement age.

The IRS states that for traditional IRAs, the penalty for withdrawing funds before age 59.5 is normally a 10% early distribution tax on top of the deferred taxes you must pay on distributions, which are treated as ordinary income. However, early IRA withdrawals made for qualified education expenses are exempt from the 10% penalty. Roth IRA contributions, since they are already taxed, are never subject to additional taxes or penalties and can be used for higher education. Earnings from Roth IRAs, though, are taxed as ordinary income.

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Look For Additional Ways To Save

Because theres no telling how much tuition will cost at the school your child chooses, or how much a college education will cost by the time your child graduates from high school, it doesnt hurt to save more than $50 a month. Because your budget is likely to change over the years as your child grows and your financial situation changes, always be on the lookout for ways to put back more money in your childs college account. Just because you dont have extra money to sock away now doesnt mean you still wont in the coming years.

Which Type Of Loan Is Best For Parents

Saving for Your Childs College Education

Among parents who took out loans or planned on taking out loans to help their kids pay for college, 63% said that they were using a federal parent loan, 24% said they were using a private student loan, and 2% said they were using a home equity loan. Federal loans are typically the first choice for parents and students, and this is advisable under most circumstances.

A Parent PLUS Loan, also known as a Federal Direct Loan, can be used at schools that participate in the Direct Loan Program. The following must be all be true of parents applying for a Parent Plus Loan:

  • You must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half time at an eligible school
  • You must not have an adverse credit history, unless you meet certain additional requirements and
  • You and your child must meet the general eligibility requirements for federal student aid.

If a federal loan isn’t possible, private loans may suit your needs. However, Rayner, financial aid director at UNG, recommends caution if you choose this option: “Private loans should be considered as a last resort for loans. In looking at private loans, you need to check not only the interest rate but how the interest rate is calculated. You also need to determine if there are any fees associated with the loan.”

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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.
  • Whats The Best Way To Invest Money For A Child

    The good thing about putting away money for your children is that there is no one right way to do it. You can open a 529 plan for your child early on or later as they get closer to college aid. Or, you can fund a brokerage account so youre not held to stricter rules about how the moneys spent.

    Of course, you can invest your money in a few different ways some combination of a 529 plan Roth IRA or, UGMA, UTMA, brokerage or savings accounts so you have options.

    Consider meeting with a financial expert to help you craft a plan thats best for you.

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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.

    How To Start Saving For Your Child’s College Tuition

    Should You Save for Your Child

    Were here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less

    If youre a parent, youve probably heard the mantra that education is the key to a successful future for your child. Youve probably also heard about the skyrocketing costs of a college education.

    In-state tuition and fees at public universities have increased 212% in 20 years, U.S. News reported. Out-of-state tuition and fees at public schools have risen 165%. And private colleges have seen a 144% increase.

    The escalating costs of college may have you worried about how to pay for higher education. Youre smart to think about how to start saving for college, even if your kids are still young.

    A recent Fidelity survey found that parents plan to cover an average of 65% of the total cost of college. But it also noted that parents are on track to meet just 33% of their college savings goal.

    If you truly want to give your child the gift of a college education and free them from overwhelming student debt, the time to plan is now.

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    How Much Does College Cost

    Currently, the average cost of tuition and fees for four years at a public, in-state college is $42,240. For an out-of-state public program, the average cost is $108,080 for four years. If your child plans to go to a private institution, the average cost is $150,600 for four years. Room and board, which covers on-campus housing and meals, costs an additional $46,480 on average for four years at a public college and $52,480 on average for private, totaling $88,720 for a public, in-state college, $154,560 for a public, out-of-state college and $203,080 for a private institution. And, in all likelihood, those numbers will continue to ascend: Rates are expected to increase by at least 1% to 2% every year to keep in line with inflation.

    Best College Savings Plans

    There are many different ways you can save for your childs college costs. Some plans have restrictions and penalties if they are used for non-college costs, while others offer a bit more flexibility. Just like with retirement investing, there are also benefits to a diverse approach to college saving.

    Heres a closer look at some of these most common options:

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    When To Start Saving For Your Kids College Tuition

    Here are the 2020-2021 annual total cost of attendance numbers, on average, from the College Board, based on a modest budget:

    Four-year public college, in-state student: $26,820 Four-year public college, out-of-state student: $43,280 Private college: $54,880

    With those numbers in mind, its never too early to start socking away money for your childrens education. Getting a head start gives your money more time to grow over the long term and to rebound after any dips.

    It also means you can recalibrate if your child seems to be on track for scholarships related to sports or academic achievements, or if your child decides to forgo college. Keep in mind that money you save will generally affect the financial aid package your child qualifies for.

    Before you launch a college savings plan for your kids, its best to have your other financial ducks in a row. You might first focus on paying off any credit card balances or other high-interest debt. Then you might want to make sure youve paid off your own student loans and saved an emergency fund , and are on track in terms of saving for retirement.

    After all, your child always has the option to take out student loans, but you cant rely on that to pay for a crisis or retirement. You wouldnt want to have saved for your kids college only to burden them with your living expenses after you retire because you havent built a nest egg.

    Start Early And With Whatever You Can

    When Should You Start Saving For Your Kids College?

    The most important part of saving for college is investing as early as possible. Since compound interest is interest earned on both the initial investment and the interest you’ve accumulated, your gains will be much larger if you start investing at birth.

    You can think about it like this: With compound interest, an initial investment of $1,000 will yield earnings of $100 after one year if there’s a 10% interest rate that’s compounded annually. Your second year, you’ll earn an additional $110 because you’ll be receiving 10% interest on the $1,100 you’ve accumulated.

    Kantrowitz recommends the one-third rule as a rough guide for how much parents should be saving: one-third of the cost of a four-year college education will come from parent’s income and financial aid, one-third from saving and investments and one-third from student loans. Once you decide what percentage of your child’s college education you’re willing to fund, you’ll have to figure out how much that will cost you each month.

    According to Kantrowitz, about one-third of your college savings will come from your investments if you start investing at birth. However, if you start investing when your child is in high school, only one-tenth of your college savings will come from your investments. In other words, your college savings will be nearly three times bigger if you started investing at birth than if you started in high school.

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    The Benefits Of Investing On Behalf Of Your Child

    Because of compounding, time can be more valuable than money, so even a little money can go a long way. For example, investing just $1 per day from birth can lead to more than $13,000 by the time your child turns 18 and may be ready to go to college or to start a career. If you wait until your child is 5 years old to make the same investment, that total falls by almost half, to just $7,700, even though you’ve invested just $1,800 less.

    So, while setting up a savings account for your child has perks, you will likely see a far greater return on your money if you put your funds in an investment account. Your options include a tax-advantaged 529 plan, “the primary vehicle of choice” for saving for college, according to Justin Halverson, a financial advisor at Minnesota-based Great Waters Financial, and a custodial brokerage account.

    Currently, the best rate offered on a high-yield savings account is around 1%, while the annualized annual return of the S& P 500 over the past 50 years is about 10%.

    Even if the stock market doesn’t produce annual returns that strong over the next two decades, you are still likely to make more money off an investment than you would from a savings account.

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