Saving for College
You're not alone—nearly 90 percent of parents report saving for college as one of their top three savings priorities, along with retirement and building an emergency fund. So how do you start saving for your children, or yourself, today? Whether you're a parent of a newborn or of a teenager or you would like to finally attend college yourself, there are plenty of methods that can help you get started saving now, potentially liberating your child (and you) from student loan debt down the road.
How much do I need to save?
Obviously, this depends on many of factors. The average cost of tuition and fees can range from just over $9,000 annually for in-state residents at public universities to more than $30,000 per year at private colleges. Multiply that by six years (the average length of time it takes students to complete a bachelor’s degree) and you’re talking about a big number—and that doesn’t include food, housing, and transportation. How do you arrive at that magic number? The Financial Industry Regulatory Authority (FINRA) has an excellent calculator to determine the amount you should invest each year to have enough to cover all college costs.
What's a 529 savings plan?
A 529 plan is a tax-advantaged savings plan designed to encourage savings for future college costs. Essentially, you invest through these accounts without the earnings ever being taxed as long as the money is used to pay for college expenses—plus grandparents, uncles, aunts, and anyone else who cares can contribute to the account. Washington State’s 529 prepaid college tuition plan is called GET (or Guaranteed Education Tuition).
Can I afford to set up and maintain a 529 savings plan?
Although some initial contributions are high for some families, the minimum monthly contributions thereafter are usually quite reasonable. Create an exacting budget and stick to it. Then start eliminating monthly costs that add up. Cut the cable. Cancel the memberships. Eat out less and plan meals and grocery shopping trips—all the standard stuff.
How does a 529 plan affect financial aid eligibility?
Investments held by parents are assessed at a maximum 5.64 percent rate when determining a student’s Expected Family Contribution (EFC). For example, if you had a 529 account worth $40,000, you report the 40k as an asset on the Free Application for Federal Student Aid (FAFSA), which likely increases your family earnings by $2,256. Plans owned by other relatives do not need to be reported.
Tips for Saving
Tip: 529 plans aren't the only option available
There are plenty of options out there if a 529 plan doesn’t suit your needs.
- Cloverdell Education Savings Accounts (ESAs): Formerly Education IRAs, ESAs are another tax-advantaged way to save for college; however, unlike 529 plans, your investment options are practically limitless. ESAs also have much lower maximum contribution limits per child and are only available to families below a specified income level.
- Roth IRA: A tax-advantaged retirement savings account that can also be used as a college savings vehicle. Think of this plan as a way to hedge your bets: if you’re child doesn’t go to college, you can still use the funds for your retirement—however, there are some income and contribution limits.
- UGMA and UTMA Custodial Accounts: A custodial account may be used for education expenses, along with other costs that may benefit your child, and provides an alternative that may be simpler, cheaper, and faster than a trust is, and they’re available to any income level. However, unlike other savings options, these accounts can be considered your child’s asset and can affect the amount of federal aid your child qualifies for.
Tip: Automate a savings plan
It’s never too late to start saving. Sure, ideally you started saving for your kids’ college when they were in diapers, but that’s not always realistic. The good news is, the older your child, the more accurate you can be with your estimations on how much college will cost. Automatic savings plans, whether you’re regularly transferring funds from your checking to a savings or investment account or setting aside a portion of your paycheck each month, is a consistent and efficient way to build that college nest egg.
Borrowing for College
While 7 in 10 seniors graduate college with student loan debt, many don't take the time to learn about all their financing options and can wind up borrowing more than they need. Let's break down student loans and some borrowing basics to find out how the right financing can help you fill funding gaps responsibly.
What are my options when it comes to borrowing money for college?
First there are student loans, which fall into two categories: federal loans and private loans.
- Federal loans: Direct loans from the federal government with a fixed-interest rate.
- Private loans: Alternative loans offered by private lenders and financial institutions with a variable interest rate.
Other ways to cover the cost of your education include:
- Federal Work-Study programs
What's a Stafford loan?
Sometimes called direct loans, Stafford loans are federal student loans available to undergraduate and graduate students and offer low, fixed interest rates and subsidized interest to eligible undergraduates.
What does subsidized mean?
A subsidized loan is a loan in which the federal government pays the interest on the loan while you are in school.
Tips for Saving
Tip: Line up a cosigner
Most private loans require a cosigner, especially if your credit isn’t great. A cosigner will legally be obligated to repay the loan if you can’t or don’t. However, a cosigner may lower your interest rate, and many private loaners allow the cosigner to kiss their obligation good-bye if the borrower has been reliable with his or her payment for 12 straight months.
Tip: Here's a great resource. . .
Federal Student Aid, a part of the US Department of Education, has a really informative and helpful website that can guide you through college preparation, eligibility, applications, and how to manage your loans.
Tip: Ask a lot of questions
As you research, start to write down your questions and concerns. Then contact your school’s financial aid office and start going through your list. Be diligent and make sure you understand the rules, requirements, and application deadlines, for both federal and private loans.
Tip: Going private? Shop around
Your college may recommend certain lenders, but you don’t have to use them. Shop around and compare interest rates, fees, and repayment options carefully.
Tip: Only sign what you understand
To make sure you understand a loan’s terms, conditions, and repayment requirements, be sure you ask your financial aid officer or lender questions like:
- How much will this loan cost in total?
- What will my monthly payments be?
- Is the interest rate fixed or variable?
- Can I get a lower interest rate?
- What fees do I have to pay?
- Can these loans ever be refinanced?
All information on this page is intended to be a helpful resource when researching, but does not constitute financial advice and should not be relied upon as such.