If you haven’t started saving for your children’s tuition, you are not alone. Many parents find it extremely difficult to set aside money for the future cost of college, especially with more immediate financial responsibilities demanding attention. Parents also face numerous choices and options, all claiming to be the best solution, for their financial worries.
In order to get started, it is a good idea to do some research. Get to know the current cost of college and create a plan – allowing for the cost of inflation. The current average annual cost of a 4-year program ranges from $14 000-$35 000 depending on the program and the school your child will attend. This can easily add up to over $50 000 over 4 years, especially when you factor in the potential yearly increase in cost of 4-6%.
The sooner you start saving, the less you will have to put away each month in order to reach your goal. Even a modest monthly contribution of only $100 can add up to a substantial amount in 18 years.
Include these savings in your budgeting and think of it as an investment in your child’s future. The money you invest now will be repaid in the form of higher salaries, better job opportunities, and employer-provided benefits which will improve their quality of life. In fact, college graduates earn up to 60% more in their lifetime compared to someone without a college degree.
Choosing a savings plan
There are many ways to save money, so take your time to research each one and weigh the pros and cons. You may find that a combination of several methods is the best way to achieve your long-term financial goals.
The most basic way to set money aside is to create a dedicated savings account. This way, the money is safe and may earn some interest depending on the financial institution. While the money is both secure and accessible, it will grow slowly over the years and there is no structure in place to help you stick to a consistent savings plan.
These plans offer a tax advantage specifically for people saving for college. The money invested is not tax deductible, however, interest, dividends and investment gains from the plan are free from federal income tax as long as the money is used for education. The money may also receive state income tax relief depending on where you live.
Education savings account:
This type of account offers similar tax advantages to the 529 plan with a few added restrictions. There is an annual maximum contribution of $2000 per beneficiary, but it allows you to spend the money on any educational institution, not just college.
A newer option, endowment plans, is growing in popularity worldwide. These plans pay guaranteed benefits to a chosen beneficiary after a certain number of years. This is an attractive option for parents who wish to start investing early, but don’t want to risk their money if their child decides not to seek post-secondary education.
Providing financial support for your child’s education can be one of the most important gifts you give your child. Saving up thousands of dollars is no easy task, but it can be made much easier by spreading it out over a couple of decades.