The most frightening question to answer for any mom and dad, whose kids are about to enter college and universities in a few year’s time!
For you, I would twist the question a little bit, and ask when should you start the planning instead of how!
You need to understand that education is investment. The earlier you plan for it, the better results will it yield in the future!
But how you want to plan for it, what options you will choose for investments are completely up to you!
I can only discuss and bring under your nose the various plans and Savings accounts you can use to grow your money to fight your child’s educational costs.
But, that’s not all. You have to do a bit of lifestyle change, and give your child’s college costs a major priority!
- First thing’s first, how much should you keep aside for college costs?
This is the most vital and basic part of your planning.
You need to have a rough idea, about how much your child’s future education is going to cost.
There would be market inflation, hike in education costs, change of subjects if a semester goes wrong, and many more. You need to keep in mind all the worst case scenarios!
Sit down with your kid, discuss in brief what will be his stream of education, for how long does he plan to study and is he planning to do any part time job to support his basic costs and pocket money or not!
You and the student must have a clear picture of the total cost.
Also don’t forget to aim for the correct university from now itself! By doing so, you will have a more approximate cost to deal with.
- What are your options of building good savings for college costs?
You can either stash away money in a personal savings account, and let it build over the years, or you can invest in other long term strategies.
1.The 529 plan:
An effective way to build your savings to tackle future college costs.This is a tax advantaged plan and come in two forms. One plan is the Prepaid tuition plan and the other is a traditional college savings plan.Both have their own benefits and perks.
With the prepaid plan, you buy credits and units in a college or university, where your child shows probability of studying in the future.
The great benefit is, if you have prepaid 50% of the college costs at some university, then you will only have to pay the rest 50% even if the college costs are hiked in the future years.
With the traditional 529 Savings plan you open up a savings account to meet your child’s future college costs.
This is tax advantaged, and you can withdraw money from this account, for any qualified expenses without any charge/s applicable.
But for any non-qualified withdrawals you will be charged penaltind taxes.
So understand better, how a 529 plan performs the best.
2.The UTMA and UGMA:
These are custodial accounts, that helps transfer of funds to a child once he/she reaches the age of maturity.
Usually an adult opens up the account being the primary custodian, and when the child reaches maturity, say age 18, or age 25, which depends on the state laws, the child becomes the owner of the assets holded in the account!These custodial accounts are usually cash accounts, and securities are to be paid in full during the time of purchase.
These UGMA (Uniform Gift to Minor’s Act) and UTMA (Uniform Transfer to Minor’s Act), could prove to be an effective way to build savings for your child’s future college costs.
You can read in full detail how UTMAs and UGMAs function and the definitions underlined under these programs in the Program Operations Manual System (POMS) article by the Social Security Administration!
3.The Coverdell Savings strategy:
This, kind of works like a 529 plan, but has an income limit, with families having an income above that limit won’t be able to open up a Coverdell account!
To be practical, Coverdell ESA (Education Savings Account) a great way to invest, only that the annual contributions are very limited!
The Internal Revenue Service has a good post up their sleeve to answer all your queries if you are interested in opening up a Coverdell ESA.
4.You can use other flexible options like opening up traditional IRA accounts or even purchasing a whole life insurance and breaking into the funds later which will be used for your child’s college expenses!
Many people invest in various plans rather than 529s, UTMAs or Coverdells, to get a good return, so surface your options very carefully.
- What are your other convenient options to fight college costs?
You have several other options to manage your child’s educational expenses if you find budgeting and building savings are becoming difficult in the present times.
Surely, with a limited income and a thin room for savings, opening up a 529 plan or UTMA might get expensive.
So here are your various ways to cope up with education costs:
1.Help your child get a scholarship or grant. It’s not that difficult. Ask him to study well, and apply for scholarships at the right time.
All the details about scholarships are provided by the Federal Student Aid for your help.
2.Have you thought about Europe? Higher studies is usually very cheap in Europe, with Germany having zero tuition fees when it comes to degrees in technical and science fields.
The number of US students going to Europe for higher studies is also significantly increasing.
3.Student loans:
This should be your last option.
If you are already suffering from huge debts, then be sure to clear them, before you apply for student loans.
It is always advised to apply for student loans with no other financial liabilities around.
Therefore, it’s better you find out the best ways to consolidate debt fast!
If you take out a student loan on top of other existing debts, then trust me, that’s the biggest mistake you will make.
The present scenario of student loan debt is very bad, with the amount crossing more than $1.4 trillion in total in our country.
So make sure getting student loans should not get you behind bars financially!
4.Help your kid get a part time job, that won’t hurt his education and obtaining a college degree.
This would make your child smart and will also support the college costs a lot!
So that was all. I wish your kid all the best for his future studies, and all the luck to you in providing your kid with both moral and financial support to achieve his goals!