Simple College-Planning Strategies: Save, Reduce and Borrow
Saving Now for Future Education Expenses
College costs are up. It’s in the news, part of the political debate—it’s everywhere. But what does that really mean? Is college still a good investment? And if so, what’s the best way to save for it?
Over the past few decades, tuition increases have not only outpaced inflation, but also most savings and investment vehicles. According to the U.S. Labor Department, the cost of college grew by nearly 80% between 2003 and 2013—more than the increase in housing and healthcare combined. And while the most recent increases have slowed, the total cost is still high, and still climbing.
If you’re like most parents, you’re concerned about how you’ll fund your child’s education. Even if you’ve managed to start saving, the fact remains that it just might not be enough. With all the competing priorities that you need to consider, such as retirement savings, you may be left confused and overwhelmed.
But even with costs on the rise, there’s some good news: It’s still possible to afford a college education and set your child on the path toward a successful future. It just takes some strategic planning and discipline. Here’s how to get started …
Develop Your Strategy Early (if you can)
The earlier you can start planning, the more money you can save. It’s hard to think beyond diapers and daycare at first, but even putting a small amount aside with each paycheck can make a big difference in the long run.
As with any goal, it’s helpful to have a target number in mind. Start by calculating how much college will cost in 4, 10 or 18 years depending on the age of your child. It’s a ballpark figure, but it will give you an idea of what you can expect. Then, compare this figure to how much you have set aside so far. Once you know what you are up against, you can start to decide on a strategy to close that gap.
When developing your saving and investment strategy, there are a lot of options at your disposal. Setting up a savings account is a good start and can be part of your long-term financial plan. Another possibility to consider is a 529 plan. Operated by a state or educational institution, a 529 plan is an education savings account designed to help families plan for college. A 529 plan can allow parents, relatives, and friends to help invest in a child’s education over time.
Coverdell ESA plans are another savings method you may be interested in using to help pay for qualified education expenses. Keep in mind, though, that there are contribution limits for this type of plan.
Investing in mutual funds outside a 529 plan may be an option as well because there would be no restrictions on what the money could be used for, unlike a 529 plan. The tradeoff would be that these accounts would not have the tax advantages of a 529 plan.
If you get creative and are willing to do some legwork, there are many ways to help reduce the cost of college. Applying for scholarships is one that should never be overlooked. Many local organizations offer small scholarships that may seem insignificant but can be a nice extra to pay for expenses beyond tuition, room and board. And then, of course, there are more substantial scholarships that help supplement the cost of college that are based on academic or athletic achievements, Just remember there are few of these to go around and therefore they cannot be counted on.
Recognizing the difference in cost between public and private schools can be a real eye opener when you are looking for ways to reduce some college costs. Tuck in the back of your in mind that a two-year school might also be a springboard for your child to begin his college experience and ease into the rigors of academia. This may help your child afford to complete his or her major course work at a more costly four-year school.
Some savings may even begin while your child is still a junior or senior in high school. Many high schools offer Advanced Placement (AP) courses to students as part of their curriculum. Some colleges will give student credit for these courses … just might knock off a prerequisite or two, you never know!
You may think taking a loan is a last resort, but the reality for many is that borrowing will ultimately fund a significant portion of their children’s education. There are a lot of options, both governmental and private, that you may use to supplement what you or your child has been able to save. The good news is that loans are available and many students and their parents take advantage of them as a way to help pay for college. But make sure whoever is signing for the loan thoroughly understands the terms of repayment and the consequences if not paid on time.
There are some resources that are often overlooked. For instance, you may have a permanent life insurance policy with cash value that you could borrow against to help supplement some of the costs of school.1
A Sound Investment
Despite challenges that come with financing higher education, college is still a smart investment and there are many options to help save for it. And when saving isn’t enough, there are plenty of other ways to help reduce the costs or help you borrow the funds you’ll need for the education that is a priceless gift.
1Access to cash values through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.