You want your child to be a successful parent. To achieve this goal, you will work hard, manage family schedules, do homework, and so on, in order to prepare your child for different opportunities in life. Education is the foundation for a secure future. A college education can be very expensive in America. A financial advisor will help you evaluate your options and create an education savings plan that maximizes your savings.
U.S. News reports that the U.S. has seen a 212% increase in tuition and fees over the past 20 years. Public schools’ out-of-state tuition fees and fees have increased by 165%. Private colleges have also seen a 144% increase over the past two decades. Fidelity also found that most parents want to cover at least 65% of the college costs for their children. Many parents don’t have the savings to cover 33% of their goal.
Despite the alarming numbers, there is still hope. Even if your budget is tight, you can still save significant money for your child’s education expenses if you make a detailed plan.
1. To Determine Your Financial Needs, Establish A Savings Goal
Understanding and acknowledging your needs is the first step to education planning. Ask yourself these basic questions to help you plan your education.
- What number of children do you currently have, or are you planning to have?
- What is the average age of a person who will enter college?
- What college do you prefer for your child? Are you looking for private or public colleges? In-or out-of-state?
- Are you looking for a school or stream that your child should study?
- Is your child willing to continue their education for at least four more years?
- Are you expecting your child to attend grad school?
It will be much easier to determine a savings target once you know the answers to these questions. You can find out how much you can save by comparing the college costs to your choices and the answers to the above questions. If you want to send your child to a top private university, you will likely have to spend more than a parent who plans to send their child there.
2. Saving For Your Child’s Education Should Not Be A Compromise To Your Financial Position
Once you have established your savings goal, you can set realistic goals and start your education planning journey. It is important to plan for college expenses while not compromising your financial position. While it is normal for parents to prioritize the needs of their children above your own, it is important that you do not compromise on financial plans such as retirement. While you can borrow money for college, borrowing money for retirement is more difficult and involves tax-related problems. This is why it is important to align your financial plan. Paying off your credit card debt is the most important thing. Avoid taking on high-interest debt. A good idea is to save money for emergencies in the future. Your emergency fund should cover three to six months of your daily living expenses. Keep on track and save for retirement. These steps will help you not to burden your children with living expenses because you did not save enough for retirement.
3. Learn When It Is Time To Save And Plan For Your Child’s Education
When it comes to education planning, time is your greatest resource. According to the College Board, a four-year public college will cost an average of $26,820 annually for in-state students, while a four-year public college will cost nearly $43,280 for out-of-state students. Private colleges can cost as much as $54,880 annually, according to the same criteria. These numbers are a reminder that it’s never too late to plan for your child’s education. No matter if your grandchild or child is just born, it is the best time to start saving for their education. You give your money more time for growth if you start planning early. You have more time to recover from losses or dips if they occur. You can also reduce the amount of money you borrow by starting to save early. Start small and increase your savings rate gradually. You can save even a little bit to help your child’s future. Automating your savings is the best way to achieve this. You can also plan early to determine if your child is eligible for scholarships. You can also affect the financial aid your child is eligible for in the future by saving money.
4. Save Wisely For Their Education by choosing wise mediums
Parents make the most common mistake when planning for their child’s education. They keep their money in savings accounts. Although it may seem safe because it protects against market volatility, it can actually reduce the value of your money over the long term. You will eventually lose your money. Because inflation is unpredictable, even high-interest savings accounts can’t keep up. According to statistics, college costs rise by approximately two times the rate of inflation every year. This trend is likely to continue. According to the College Savings Plans Network in 2021, the cost of college for a toddler will be $244,667.00 when the child is old enough to go to higher education. The cost of a private college will be $553,064. It is important to select the best way to save money for your child’s education. These are some options:
- 529 college plans: 529 plan is a state-sponsored, tax-advantaged plan that allows you to invest after-tax dollars in order to save money for your child’s higher educational expenses. To earn long-term safe and effective returns, the money you contribute to the account is invested in low-cost stocks and secure bonds. Your account can grow tax-free and your withdrawals are exempted from taxes if they are used for qualified education expenses such as tuition, room, board, books, etc. Non-qualified expenses are subject to a 10% penalty. Every state has its own rules regarding a 529 college program. Depending on the benefits, you can invest in either your state’s 529 education program or in another state. You can also change the beneficiary at any time to provide for another child’s education. There is no limit on the number of contributions that you can make each year. The annual limit on contributions to your 529 account is not greater than the expected fee for qualified higher education. You must carefully evaluate the qualified expenses you have and follow the 529 withdrawal rules. Apply early for withdrawal if possible.
- 529 Prepaid Tuition Plans: 529 Prepaid Tuition Plans are another way to help your child pay for their education. These plans allow you to cover tuition fees, which can be the most expensive educational expense. A 529 prepaid plan allows you to pay all or part of the cost of education at a particular university or group of institutions in advance. This will allow you to avoid future tuition price increases, which are predicted to rise by 5% annually. 529 prepaid plans do not have income limits or age limitations and provide tax-free growth with high contributions rates. You can choose to change the beneficiary at any time, just like 529 college plans. This will allow you to benefit another child or yourself. This plan may be ineligible if your student is not enrolled at college or does not receive a full scholarship. You have the option of changing the beneficiary or paying a 10% penalty to withdraw the remaining balance.
- Coverdell Education Savings Account: You can also use the Coverdell Education Savings account to help save for your child’s education. The Coverdell plan works like a tax-deferred trust. This account allows you to contribute after-tax dollars to help pay for college, elementary and secondary education. Your funds grow tax-free, and you don’t pay any taxes when you withdraw them. The distributions from your Coverdell savings account can only be used to pay for qualified educational expenses. This plan covers qualified expenses that are not covered by the 529 college savings program. Coverdell education savings accounts permit tax-free withdrawals to pay for tuition, uniforms and other charges at primary and secondary schools. A 529 plan does not offer as many investment options. You can save only $2,000 per year in this account until the recipient turns 18 years old.
- Roth IRA: Besides saving after-tax dollars and earning tax-free growth, a Roth IRA allows you to withdraw tax-free. A Roth IRA is a smart choice for planning for your golden years and paying for your child’s education. The Roth IRA is more flexible than other retirement accounts and offers significant tax benefits. Unlike other retirement accounts like a 401 (k), a Roth IRA does not have Required Minimum Distributions. You cannot withdraw your funds prior to the age of 59.5. Your savings will accumulate interest over a longer period of time. This restriction on withdrawal can be a problem when it comes time to pay for the education of your child. This drawback can be overcome with good time management. It is possible to use funds from other accounts initially to pay education costs and then later deploy Roth IRA funds to cover higher education expenses. Roth IRA gives you a wider investment portfolio and allows you to choose how you want to use your money. Roth IRA is different from other plans such as 529 college savings plans or 529 prepaid plans. You can contribute as much as $6,000 to your Roth IRA for 2021. You can put up to $7000 per year if you are over 50. You will be subject to a penalty of 6 percent for any contributions beyond these limits. This penalty is applicable until the problem is rectified.
You can also put your money in a custodial bank account like UGMAs or UTMAs (Uniform Gift to Minors Act, and Uniform Transfers to Minors Act). You can also invest in mutual funds, establish a trust, take out a permanent insurance plan or borrow money from your home equity to help fund your child’s education costs.
5. Include your children in the planning of their higher education
Talking about education costs with your child while they are in high school or college is a good idea. It is a good idea to have a discussion with your children about the financial implications of college funding decisions. Your child’s choice of college or study field will have a significant impact on their salary and their ability to repay loans. This will also help your child understand the consequences of borrowing and encourage them to take some responsibility. According to a College Savings Foundation study, 89% of students intend to work to pay for college. Students don’t expect their parents to pay for their education and are willing to take on the responsibility of funding it.
To summarize
You can give your child the gift you love without putting them in student debt. To find out the best way to fund your child’s education, consult a professional advisor.
This post was written by All Seasons Wealth. At All Seasons Wealth, we provide expert advice and emphasize the importance of creating in-house portfolios to personalize your strategy for asset management, financial planning, and cash management. We utilize research and perform market analysis to provide you with financial planning in Tampa. No matter your needs, we can work with you to develop a consulting solution tailored to you.
Any opinions are those of All Seasons Wealth and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Past performance may not be indicative of future results.