As another school year comes to a close, you may find yourself thinking ahead to the next chapter for yourself or your high school student, and even if years away, considering the post-secondary education options for your child in the years to come. While it’s exciting to consider future education possibilities, you may also be wondering how you will ever have enough saved to get over the financial hurdles that come along with higher education. Bottom line? It’s never too early or too late to start building a college savings in preparation for your or your child’s post-secondary education costs.
The Student Debt Burden
It’s no surprise that post-secondary education comes with a hefty price tag. The average cost for college tuition has nearly doubled at both public and private institutions over the last 30 years and the increased cost has led to more school loans and requests for financial assistance than ever before.
With the total average student loan debt at about $1.75 trillion, and borrowers owing about $29,000 on average, paying for higher education is no easy feat. But creating a plan to pay for higher education costs is a crucial first step in avoiding future financial debt.
Tips to Building an Education Savings
Not surprisingly, more than half of college students graduate with debt. Understanding and identifying how to build a college savings can help set you on the right path to experiencing less future financial burden.
Start saving sooner than later.
It’s never too early to start saving for education. Begin with whatever funds you can make available and stay focused on your long-term goals.
Determine how much to save.
While you may be years away from packing up for your first college experience or sending your child to a university miles away, consider how much you would like to have available for education, such as a percentage of an estimated total cost. Or, use the average annual cost of tuition at in-state universities, for instance, as a starting point and work from there.
According to U.S. News, the average cost for in-state public schools (tuition and fees) in 2021-2022 was $10,338 with private universities and out-of-state colleges and university tuition costing much higher annually.
When creating a plan to build college savings, be sure to plan for more than tuition alone since other costs, such as room and board, textbooks and supplies can add up quickly per year increasing your overall costs.
While the average cost of tuition and fees to attend an in-state public school is about 73% less than a private college, you may consider having conversations with others about future goals and aspirations and the type of schooling that is required. These decisions can drastically impact the overall costs you’ll experience with post-secondary education.
Consider using these numbers to help you identify how much money you’re willing to set aside annually or even monthly until the time comes for the next big chapter. But don’t forget, costs will likely rise by the time you or your child reaches college, especially if it’s years away! It’s a good idea to review your goals and savings frequently to adjust your plan as actual costs come into view.
Set long-term goals.
Costs associated with higher education are a significant financial challenge for many families. Set realistic goals that align with your family’s financial situation. Try setting aside a designated amount monthly or annually per child in your household. For example, setting aside $100 monthly from the time your child is born until they are 18 years old would add up to over $21,000, and that’s without any interest! You might consider using this total for one year of higher education or allocating a set amount of the total for each year of schooling.
Do you have relatives constantly asking you for gift ideas? Suggest they provide money for birthday, anniversary or other gifts that can be used toward your future education costs. Building a college savings can start today, even with a small amount.
Understand the types of college savings plans.
Choosing the right college savings plan can be overwhelming as there are many options, and most with their own set of complex rules. When first reviewing your options, understand that many families use a combination of options to financially afford post-secondary education. This might include savings, financial aid (such as federal loans, work study or grants), scholarships and student loans. (Don’t forget, in order to qualify for various federal grants and financial aid, you must complete the FAFSA—Free Application for Federal Student Aid—annually.)
There are generally three common college saving plans that families will consider when building an education savings.
- 529 Education Savings Plan: A 529 is an investment account that is typically opened by a parent for their student to be used exclusively for school costs. Money can be withdrawn for college or other qualifying educational expenses without paying income tax or investment gains. These accounts generally have more potential for growth, similar to a 401(k) and contributions grow tax-free although non-qualifying withdrawals are taxed. Be careful as there can be a tax penalty if funds are withdrawn for purposes beyond education.
- Education IRA (“Coverdell” account): Similar to a Roth IRA for retirement purposes, a Coverdell education account covers education expenses from K-12 school tuition to vocational school or textbooks and supplies. Funds grow tax-free in this account, but you can only invest up to $2,000 (after tax) annually per child. Notably, if your child doesn’t need funds in the account, you can transfer the money to a sibling for their education, however, the account must be used by the time the beneficiary reaches age 30.
- Savings account: Standard custodial savings accounts are another great option to consider when building an education savings. Typically, a savings account can be easily accessed both in-person and online at your local financial institution, like Verve, with minimal fees and balance requirements. Consider setting up automatic monthly transfers to specific education savings accounts to help avoid the temptation to skip a month or two of savings. Learn more about the variety of savings accounts offered through Verve and contact a representative to get an account set up today.
Reach out to a financial representative at Verve for more information and to better understand which solution will work best for your financial situation as you look to start building a college savings.
Looking for other financial tips for your family? Check out our Family Finances blog posts to help set your family on the path to a successful financial future.