The quest for saving up for your child’s future college education starts from the minute they’re born. And boy, do you have some serious saving up to do since the cost of college has reportedly tripled in the last three decades, which leaves students buried in debt to the size of the Pacific Ocean. Back in 2016, The Wall Street Journal reported that the average graduate student loan debt is an astonishing $37,172. And that was just the average.
According to data from the Federal Reserve Bank of New York, the overall student debt in the United States was over $1.3 trillion. If nothing is done soon, then your kids will continue to struggle to pay their debt by the time their own kids start college.
So to prevent that horrible future from ever happening, we’ll share some of the best college saving tips and guides here in this article.
1. Start As Soon As Possible
The best time to start saving for your child’s education is even before they’re born. Don’t focus so much on buying their birthday presents or holiday gifts if you want your child to be debtless after they graduate. So start putting money only into their education – which could be daily, weekly, or even monthly.
2. Know Your Cash Flow
Having a deep understanding of your own cash flow is another way to save up for your child’s college education. This is by figuring out where the money comes in and out of your life. This will give you a more informed grasp about the kind of expenses you need to cut back on to increase your savings or continue making certain expenses, especially for necessities like food and medication. You can also figure out how to allocate money to newer expenses when you have a child.
In short, people need to understand their own spending behaviors and habits in order to have a firm understanding of how they need to be saving for their ward’s college education.
3. 529 Plans
529 plans are one of the most popular ways to save up for college. With this plan, you can make after-tax contributions into an account under your ownership, with your child being named the beneficiary. The money you invest in that account can be contributed and the gains and income from those investments won’t even get taxed. So long as you simply use the money for qualified educational expenses – such as college-going and tuition fees – none of your gains will be taxed. Furthermore, some nations can include their own tax incentives, like state income return deductions.
To build the 529 savings, you should:
- Contribute extra cash for college savings: when your kids have outgrown their toy years, sell them off at garage sales or even online and then include the proceeds into their college funds.
- Get your friend and family members to contribute: convince your family members, close friends, and loved ones to contribute to your child’s 529 plans instead of having to buy presents for their birthday every year. But if that’s not possible, then it is the parents who should contribute to the 529 plans instead of or in addition to buying gifts.
- Set half of your child’s allowances for their college: you can use this when your children are older and learn more about responsibility.
4. Fund Your Employee Retirement Account
True caring parents would travel across the world to help their children and that’s why some even consider prioritizing their child’s college funds over workplace retirement savings. But that’s not to say your kids won’t have other options available such as work-study programs, grants/scholarships, and student loans. But once you’re retired, you don’t have that many options left.
But if you want to balance college and retirement savings, then do the following:
- Put extra cash into college: you can use a 529 savings plan for this or even a dedicated bank savings account.
- Fund enough to get the complete employer match: 401(k) is a must, that is if you want free money.
- Boost retirement savings with raises: when you get raises, send it over to your employer retirement plan. We recommend saving about 10-15% of the income into retirement.
5. Traditional Savings Account
This is a savings account that everyone should have – a place to store emergency funds as well as short-term savings. Some of the best high-yield, widely available savings accounts pay approximately 2% APY.
There are plenty of reasons as to why you’ll be better off storing your child’s college-savings in this account. It’s one of the safest places just for the money, as long as the account is insured by the Federal Deposit Insurance Corp (or the National Credit Union Administration). Another benefit is that even if the bank goes bankrupt in the end, your savings will still be there. On top of that, you’ll be earning interest besides the money you deposit.
There are, however, some drawbacks to this option as Mark Kantrowitz, a student financial aid expert says that there is an asset protection allowance, or APA, which protects a fraction of the asset of parents depending on the age of the older parent when determining financial aid.
Because financial aid is ascertained depending on assets and income from previous years, even students with a decent amount of savings in their name could end up with a less favorable package. Furthermore, savings account yields are inferior to what parents earn by taking more risks.
6. Consider Automatic Contributions
Instead of constantly going over to your bank to make deposits into your account, you can ask your financial institution to set up automatic deposits from your salary account to your savings account. That’s why the best option for you is to choose an automated saving and investment platform that offers higher interest rates than your own back. A very good example of this is OCTA. This way, you’ll be able to be consistent in contributing to your child’s education and you don’t need to work too hard to make it happen.