A college education is the best gift for any high school graduate. Although apprenticeships and vocational training are still valuable for specific trades, having a college education gives your children better tools to help them succeed, no matter what profession they choose. Of course, with the value of a college education comes rising costs, which is why it is never too early to include college fees in your financial planning.
The benefits of a college education are many, but one of the biggest benefits is closing the earnings gap. According to the Chronicle of Higher Education, a college education adds an average of $32,000 to your annual salary, which adds up to $1.4 million over a lifetime.
College is a good investment that offers proven returns, but the costs are still high and getting higher. A College Board survey revealed that for the 2017-18 academic year, a moderate college budget is $25,290 for the year at a state public college and $50,900 for a private university. Unfortunately, parents typically don’t plan ahead for college fees. Sallie Mae reports only 56 percent of parents are actively saving for education, and their average savings is only $18,135.
The earlier you start saving for your children’s college education, the better. But before you start putting money away, be sure to have a strategy. Like every other big expense, saving for college requires financial planning, so here are six strategies to help you save for your children’s education.
1. Budgeting for your savings
Start with a savings account or money market account that will give you interest on your money. The interest rates for most savings accounts are modest, but it’s a great place to store your budgeted money until you decide what other strategies you want to try. Many banks help you save with automatic transfers that move money from your checking to your savings account, or with cash programs such as Pocket Change that help you add to your savings.
2. Apply the “2K rule”
The 2K rule was developed by Fidelity Investments as a guideline for college financial planning. The rule suggests that you multiply your child’s age by $2,000 to come up with a college savings target. For example, if your child is 5, then your college savings should be $10,000; if they are 15, then you want to have $30,000 saved. By the time they reach 18, your $36,000 college fund can help cut college costs in half, and you can make up the difference with scholarships and student loans.
3. Use a 529 plan or education IRA
A 529 plan is a tax-advantaged savings plan sponsored by state agencies, universities, and other institutions. A 529 plan has specific tax advantages, depending on your state and situation, and if you use the money for qualified educational uses such as tuition, it is not taxable by the federal government. There are various types of 529 plans, but the most common are education savings plans, which work like Roth IRAs and save after-tax dollars. An educational savings account (ESA) is similar, but allows you to choose where you invest. An education IRA works in much the same way, allowing parents and guardians to set money aside that can be withdrawn tax-free for educational purposes. There are also prepaid tuition plans, which are typically set aside for state colleges but can be converted to funds for private institutions.
4. Start college early with AP classes
One strategy is to reduce college costs by eliminating some prerequisite classes. Advanced placement (AP) classes allow your student to take college-level coursework in high school. If the student achieves a high score on the end-of-course AP exam, they could “test out” of and earn credit for certain college classes, such as English or history.
5. Have your kids budget and save for their future education
Emphasize the importance of saving to your children and encourage them to establish their own college savings fund. This will not only give them a sense of investment in the process, but it will also help them see the value of a college education. In addition to having them maintain their own college savings account, consider matching their fund with your own contributions to encourage them to save.
Consider the various savings vehicles available as part of your college financial planning and choose one or more that meet your needs. In addition to savings and money market accounts, for example, you might consider a certificate of deposit (CD), which offers higher interest rates in exchange for a commitment to not access the funds for a set period of time from six months to 10 years. Also balance the benefits of investments, a 529 plan, an ESA, and other types of savings plans. Chances are you will want to use more than one.
Above all, start saving now. The more you can save, the more you can help your children lay the foundation for a successful future, starting with a college degree. If you need advice on financial planning, we can help.