Are You Saving for Your Kids' College? Tips for Success
Whether your child is 5 or 15, it's never too early or too late to think about saving for higher education. Higher education at colleges and universities and technical schools pays off in higher regular and lifetime earnings and lower unemployment rates for most people. For example, the U.S. Census Bureau estimates that individuals with a bachelor's degree will earn an average of one million dollars more over their lifetime than individuals with a high school diploma.
Starting to save for your kids' college now can give them—and you—a head start and more options. Grants and scholarships cover, on average, only about one third of college costs. College loans, if you have to borrow large amounts, can saddle your children with big debts just as they are starting out as independent adults. Saving for college is very important—and it's never too late. Just check out these tips and resources.
College costs include tuition, room & board (housing and food), books and other expenses. These can add up to many thousands of dollars. Even though various types of financial aid are available, for the great majority of students, it is generally not enough to cover all the expenses. Many scholarships and grants, for example, only cover a portion of tuition. Even government-supported student loans (Stafford and Perkins) and parent loans (PLUS loans) can mount up and leave students (or parents) with large sums to pay back; so college loans should be the last piece of the financial aid plan, not the first.
The more you save, the more options you will have when it comes time to pay for college. Having savings helps you and your children find the school that fits their needs and goals, not just the cheapest option. Although financial aid formulas include an expected family contribution, the formulas count only a small portion of a family's assets. Yet, there are those who believe that it's better not to save because parental savings may reduce the amount of financial aid a student qualifies for. However, using savings for college costs much less overall than taking out loans (which is what most students must do when there are no savings). For more details about why this belief and others are mistaken, see this article, Myths about Saving for College from finaid.org.
Which is more important—college savings or retirement savings? Most experts recommend putting your retirement fund first. While it is important to save for college, experts note that saving for retirement is a higher priority; there are options beyond savings for college but not for retirement, where Social Security provides a foundation but is not adequate. Experts also recommend that you don't withdraw retirement funds to pay for college. Retirement savings typically aren't included in financial aid formulas used to determine the family contribution, so withdrawing funds will only hurt your retirement.
How do I decide where to save?
There are various savings vehicles that you can take advantage of when saving for college. Some vehicles such as 529 College Savings Plans, Coverdell Education Savings Accounts, and Series EE and I Savings Bonds have tax advantages. Other vehicles such as traditional savings accounts or brokerage accounts don't have any tax advantages. For more information about various college savings vehicles, check out FinAid.org. Then use their College Savings Checklist to help you research your options and choose the best accounts for your situation.
What about loyalty or affinity programs such as Upromise®?
These types of programs provide rewards in the form of college savings. You earn the rewards when you shop at retailers who participate in the program. While these programs aren't meant to be your primary savings vehicle they can provide some additional savings. Some of these programs also allow you to invite family and friends to participate.
My student is a high-school senior, is it too late to save?
It's not too late to put some money away. Put aside as much as you can each month. And you can continue to save while your student is in college. Make sure that you set up the account in your name (or keep the funds in one of your accounts) because assets in your student's name have a bigger impact in financial aid formulas.
Look for other sources of funds. If family members, such as grandparents, aunts, and uncles, have shown interest in helping financially, now is the time to tap these sources. Local scholarships may also be a source. Does your workplace offer scholarships? What about local businesses or groups? What about your credit union?
What if my student is in high-school?
Start saving as much as you can preferably in a tax-advantaged college savings vehicle. You'll want to keep the account in your name since assets in your student's name have a bigger impact in financial aid formulas.
Increase the amount you are saving each year and when you receive a raise. Continue contributing to the fund while the student is in college.
Deposit all or a portion of any tax refunds, bonuses from work, or other windfalls in the college saving fund.
Setup a college savings vehicle, such as a 529 plan, that family members can contribute to. Ask family members to contribute to the college fund instead of buying presents.
What if my child is in elementary school or younger?
When you start saving early, time is on your side. The earlier you start, the more time your savings have to grow. Make college savings (and retirement savings) part of your monthly budget. It doesn't have to be a large amount, as long as you save consistently.
Take advantage of payroll deduction or transfers to automatically move money from your checking account to your college savings account. If it's not in your checking account, you probably won't miss it.
Increase the total amount of savings each year. In addition, increase the savings when you get a raise. Put a portion of your tax refund, bonus from work, and any other windfall in the college savings fund.
If you have a regular expense that stops, such as a loan payment or daycare fees, continue making that payment but in to the college savings fund.
Setup a college savings vehicle, such as a 529 plan, that relatives can contribute to.
Every bit makes a difference.
Recently, the news has been full of stories on the rising costs of tuition for higher education. Overall, that is true. But it's important to remember that a wide variety of public and private institutions work hard to make higher education affordable. For example, the average annual cost for tuition and fees at 2-year public colleges is $2713 and for in-state students, $7605 for 4-year public colleges. Every dollar you save now can help your child achieve his or her goals for higher education.
For more information