The overall amount of money that Americans owe on student loans is an unbelievable $1.7 trillion. Some students may get some or all of their debt forgiven.
The 10th Annual College Savings Indicator from Fidelity Investments shows that while the average parent plans to pay for about 70% of their child’s college costs, less than 30% are actually on track to do so. Starting to save money for your child’s college now is the first thing that needs to be done. It’s best to start immediately: There is a significant effect of interest building up on interest. You can get closer to your goal of paying for college faster with 529 plans, grants, and the help of a financial planner. Don’t worry about where you are in the savings process—it’s never too late to start.
The United States has an astounding $1.7 trillion in student loan debt. Some graduates may be able to get their loans cancelled, but many others will not.
The 10th Annual College Savings Indicator from Fidelity Investments shows that while the average parent plans to pay for about 70% of their child’s college costs, less than 30% are actually on track to do so. Starting to save money for your child’s college now is the first thing that needs to be done. It’s best to start immediately: There is a significant effect of interest building up on interest. You can get closer to your goal of paying for college faster with 529 plans, grants, and the help of a financial planner. Don’t worry about where you are in the savings process—it’s never too late to start.
How much does it cost to go to college?
The average cost of four years of tuition and fees at a public university in the same state is now $42,240. Over four years, an out-of-state public school will cost you an average of $108,080. For four years, the average cost of going to a private college is $150,600. Room and board cost an average of $46,480 for four years at public universities and $52,480 on private campuses. This adds up to $88,720 for a public university in the same state, $154,560 for a public university in a different state, and $203,080 for a private college. Those numbers will likely keep going up over time: Rates are expected to increase by at least 1% to 2% each year to keep up with inflation.
How much money should you set away?
Many factors can change the exact number, such as inflation, rising school costs, and so on. The “one-third rule” is one way to get a rough idea. According to financial aid expert Mark Kantrowitz, “Like any major lifecycle expense, you can spread the cost over time, with one-third coming from savings (past income), one-third from current income, and one-third from loans (future income).”
The “3x rule” says that the cost of college triples in the 17 years between when a child is born and when they start college. This rule is often used with the “one-third rule,” which says that you should try to save enough money in the year your child was born to cover the total cost of a four-year college education. Take that number and subtract the years your child has left until they go to college. Those yearly amounts can be broken up into monthly amounts that can be used to make a plan to save for college.
One way for a parent to save for college for their child born in 2021 is to divide $88,720 by 17 ($5,218) to get a yearly savings goal and then divide that number by 12 to get a monthly savings goal. According to the “one-third rule,” the monthly saving goal is now $435.
The US Department of Education has cost tools, but there are also a lot of other calculators that can help you save money for college.
How to start putting money away for your child’s college.
There are many different ways to start saving for college for your child. Here are some of the best ways to save money for college.
529 programs
The way a 529 plan works is similar to how a Roth IRA works. With income that has already been taxed, savings are made in a tax-deferred account. If the money is used for certain college costs, your child will not have to pay taxes on the payments when the time comes. A 529 plan can be used as either a savings account or a plan to pay for college ahead of time. A few states only offer college savings plans, so only a few offers both.
Books, room and board, supplies, and class materials like laptops and calculators are all things that 529 plans can pay for. Some of the costs and charges of a 529 program are enrolment fees, yearly maintenance fees, fund expenses, and administration fees. These costs and charges may be different for each plan and state. A comparison tool can help you see the differences in the fees for the various 529 plans in your state.
Parents and grandparents can only use prepaid tuition plans in certain states. These plans let them lock in today’s state tuition prices for public and private schools. If your child changes their mind about going to college, you can give the money from their saved tuition plan to their younger sister.
There are some risks with a 529 plan. That cash can only be spent on something other than anything, and with some prepaid education plans, there’s no promise that the program will work. When you put money into a 529 plan, you may get tax breaks, but there could be problems if your child doesn’t get a bachelor’s degree or if the money isn’t used for qualified college costs.
IRAs
You can save money in a Roth IRA to help pay for your child’s college. People usually think of Roth IRAs as a way to save for retirement, but they can be used for anything that doesn’t result in a taxable payment. Talk to a financial expert to learn more about the pros and cons of using an IRA to pay for your child’s college costs and any fees that might be involved. You can save that money for retirement if your child changes their mind and doesn’t want to go to college.
Scholarships and grants
One more way to fight the rising cost of college is through scholarships and grants. Your child could save about $7,310 for a public college, $19,180 for a private non-profit college, or $21,560 for a private for-profit college. There are a lot of grants and awards for kids who do well in school or sports. This means you won’t have to pay as much for their college. Students who do well in many different hobbies and interests outside of school can get scholarships. Every year, more than $24 billion is given to college students through grants. Five million students receive these awards. There are a lot of grant databases online where students and their families can look for ways to get money.
ESAs
The Coverdell Education Savings Account is a different type of low-tax trust account. Once your child turns 18, you can’t make any more gifts and can only give $2,000 a year. Like UGMAs and UTMAs, all the money must be used by age 30. Withdrawals are tax-free if they are used for qualified school costs. ESA money, on the other hand, can be used for K–12, high school, college, and even food and housing.
Trusts
Parents and grandparents can use educational trusts to save money that will be used to pay for a recipient’s future college costs. Most of the time, parents or grandparents with a lot of money use these trusts as part of a tax plan to limit the amount of their taxed wealth. When the person turns 21, the trust’s money must have been given out. These trusts are used less than they used to be because many families have found that 529 plans work just as well for them.
Save money
Any goal can be saved in a regular savings account, even for college. Any amount can be put into the account; no minimums or maximums exist. You can get your money out whenever you want. It’s important to remember that the interest rates on savings accounts right now are less than the inflation rate. This means that your money won’t grow over time.
Make a plan with the help of a financial planner.
For families with high school kids, the average amount saved each month is $200. More than half of these families wish they had saved more. People who worked with a financial expert saved about $14,000 more than people who didn’t.
Talk to a financial adviser before you start saving for your child’s college. They can help you figure out the best way to cash out your savings or take a withdrawal when the time comes. You can make intelligent savings plans to help your child pay for college with the help of a financial counsellor. Some people can help you save money for college and apply for grants, scholarships, and other types of aid.
