You probably want what’s best for your kids. You may want to give your oldest and youngest the same opportunities, and you probably hope that one day, they’ll end up even better off than you are.
To this end, sending your kids to college can help prepare them for the future. Beyond that, it may help them land gainful employment down the road. In fact, statistics show that 90 percent of new jobs are going to college graduates. So if you want to give your kids a better opportunity to compete in the job market, you may feel the pressure to do everything you can to support their higher education.
There’s just a little bit of a problem: College is super expensive.
In fact, one study found that a single year at the average public school costs $25,290 for in-state students and $40,940 for out-of-state students. It’s even more expensive at private schools, where costs average $50,900 each year. These numbers will likely continue to increase as time goes on.
That being the case, it comes as no surprise that most students graduate with significant debt. The average member of the class of 2018, for example, graduated with nearly $30,000 worth of debt—which isn’t exactly the best way to start a career and build a life.
To make education more affordable and lessen their children’s debt, 60 percent of parents are already saving for college tuition. The bulk of these funds are put in 529 accounts, which are specialized accounts that incentivize saving for higher education with a potential tax benefit if used for qualified educational expenses (more on 529 plans later).
The good news is that by starting to save early and knowing what financing options are available, you may be able to afford college with fewer loans, setting your kids up for successful careers with as little debt as possible. With that in mind, let’s take a look at seven tips as you start to figure out how to finance your kids’ education.
7 Tips for Saving for College
1. Get your own financial house in order before saving for your kids
First things first: if you don’t have the money to pay your own bills, it’s unrealistic to think about funding your children’s education. Before saving for college, you may need to start planning your retirement, paying off high-interest loans, and setting aside enough money to cover unexpected expenses (e.g., home repairs).
2. Consider 529 plans
A 529 plan is like a Roth IRA; you fund it with post-tax dollars, and you don’t have to pay taxes on the money you withdraw—assuming it’s used for qualified education expenses. In an ideal world, money in your 529 account will grow over time, making it easier for you to pay for college. In the event that you don’t use your 529 plan to cover qualified education expenses, you will incur penalties (similar to withdrawing IRA funds before retirement). For more information on 529 plans, check this out.
3. Search for grants and scholarships
You might be able to reduce college expenses by encouraging your kids to apply for grants and scholarships. In 2017-18, for example, 7 million students received upwards of $28.2 billion in Pell Grants. And although the average college student may receive up to only $5,000 in scholarships, every little bit counts.
4. Study student loan options
The average family needs to borrow money to send their kids to school. In fact, 70 percent of students graduate college with debt; according to the National Center for Education Statistics, 85 percent of students qualified for financial aid in 2015-16. Odds are that your children will have to take out loans to pay for school. Research your options to see which ones make the most sense for your specific situation. Generally speaking, financial aid is determined based on your income and assets during the year prior to applying for school (usually your kids’ junior year of high school).
5. Consider AP classes
AP classes can help your children earn college credit during high school—assuming the university they ultimately end up attending accepts AP credits. Depending on how many AP classes your kid takes and if they past the AP test(s), they might be able to obtain college credit and up to skipping an entire year of college.
6. Consider having your small business pay for tuition
If you own a small business with a tuition reimbursement plan and your kids work for you, you can have your company help pay for college. There are a few caveats here, however. For example, the education in question has to directly relate to the business. For more information, read this.
7. Consider other college savings accounts
Though 529 plans are the most common kind of college savings account, you may also want to look into other kinds of accounts, like Coverdell accounts, which are “education IRA” accounts that can be funded with up to $2,000 each year, and Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts, which are custodial accounts your children can use to hold and protect assets until they reach adulthood (i.e. turn 18 or 21).
While Coverdell accounts operate much like IRAs, UGMA accounts can hold stocks, bonds and mutual funds, but not riskier assets like stock options. In addition to what UGMA accounts can hold, UTMA accounts can also hold real estate assets.
Keep in mind that money saved in Coverdell accounts must be used on education. Funds in UGMA and UTMA accounts are subject to taxation, and can be used however the owner wants once they reach adulthood.
Ready to Start Saving for College? A Financial Advisor Can Help
To help your kids pursue a bright future, you may decide to save for college. Financing your kid’s college education can seem overwhelming—particularly when you need to manage your own finances, balance other investments, and plan for retirement.
The good news is that you don’t have to go at it on your own. If you need a bit of help figuring out how to save for college, your financial advisor can provide insights and advice based on your individual situation.
Looking for a financial advisor but not sure where to start? Check out How to Choose a Financial Advisor, a guide and checklist to help you select the right advisor for your needs.
By partnering with a trusted financial advisor, you may get help developing a college savings plan that works best for you and your family. Schedule a consultation today to see how EP Wealth Advisors can simplify the process for you.