These days, yearly tuition averages $9,410 at public, four-year, in-state colleges, according to The College Board.1 That figure climbs to $32,405 at private nonprofit colleges.1 Add another $10,000 for room and board, multiply by four years, and you’re looking at about $78,000 for public colleges and $169,000 for private schools.
Source: The College Board
External financial resources - such as academic or athletic scholarships, state-funded grants, and so forth - may exist. But often they don't materialize as hoped - or students' interests veer onto new pathways that might make them ineligible for certain awards.
In short, every parent with college-bound kids needs a financial plan. The good news is, you don’t have to save all the money needed for post-secondary education. Read on to see why and learn strategies to help build the funds you do need without shirking your other financial obligations.
What You Really Need to Save
Financial experts typically suggest that parents save about one-third of the total expected cost of college.2 That’s about $26,000 based on the public school figures above.
This approach assumes that you’ll be able to pay another third of the costs while your child is in college, factoring in your own financial contributions, as well as grants, scholarships and work study. The last third would come from student loans.
A Smart Start
The best saving strategy is simply starting early and contributing regularly. This lets you take advantage of the longest possible timeframe and maximize the impact of compound interest.
Based on the $26,000 target, if your baby is born this year, you could meet your target by setting aside around $125 per month.3 Of course, the more you can save, the less you or your student will need to rely on other forms of financial aid during the college years.
But even if your child is already in high school, don’t despair — and don’t delay any longer. Having something saved is always better than having nothing at all.
Pick Your Savings Vehicle
There are numerous savings options that offer special advantages to college savers. Here’s a quick look at three:
- 529 plans. Most states now offer a 529 plan, and many provide tax incentives for contributions. In addition, savings in the plan grow tax free, and withdrawals aren’t taxed if you use the money for qualified education expenses.
- UGMA and UTMA. The Uniform Gift to Minors and the Uniform Transfer to Minors Act are custodial accounts that allow minors to own securities, real estate and other property. Any income from the account is taxed at the child’s rate. The funds are not required to be used for education, but if you do so, they’re considered student assets for financial aid purposes.
- Education savings bonds. If you redeem Series EE and Series I bonds issued after 1989, you can typically exclude the interest earned from your gross income for tax purposes. You, your spouse or a dependent must incur education-related expenses, and other requirements apply.
- Certificates of Deposit. Due to low interest rates, CDs have recently become less popular, but they are still reliable options for conservative savers. Some savers use a technique called "laddering" CDs, combining different terms to take advantage of higher interest rates on longer term CDs while keeping access to some of their money. For example, if you want to put aside $10,000, you could put $5000 in a 2-year CD, $2500 in a 1-year CD, and $2500 in a six-month CD. While this option may not be the primary solution for your college savings, it can provide flexibility for a share of your funds.
The Final Pieces
As your student approaches the last two years of high school, be sure to visit the Federal Student Aid website. It provides important information about the Free Application for Federal Student Aid (FAFSA) as well as insights on specific types of financial aid. Also consider investigating a home equity line of credit, which can help you fill in any financing gaps before and during your child’s college career.
The best solution for you may be a combination of vehicles that provide you with the right amount of return and flexibility. Consider your long term goals and your unique tax situation before opening any accounts, and talk with your personal relationship banker about the right savings options for your needs.
1 “Trends in College Pricing 2015,” The College Board, https://trends.collegeboard.org/sites/default/files/trends-college-pricing-web-final-508-2.pdf, accessed June 20, 2016
2 “How much do I need to save for college?” Time.com, posted May 31, 2014, http://time.com/money/2802161/how-much-save-for-college/, accessed June 28, 2016
3 Based on $100 initial deposit and 5% rate compounded monthly; Bankrate.com calculator, http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx?ic_id=home_smart-spending_bank-rates_globalnav, accessed June 30, 2016
This information is for educational and illustrative purposes only.
© 2016 Customer Communications Group, Inc.