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As a parent of a 3-year-old, I’m just trying to get through my daughter’s current tantrum phase—figuring out the best way to save for college feels all but impossible. Even though I started saving before she was a year old, it’s tough to shake the anxiety over whether I’m saving enough.
So I spoke to the pros to learn how much to save for college and how to get there without stressing out my entire family in the process.
What I found is that despite the scary headlines, preparing for my child’s educational future is totally doable. Really.
Let’s be blunt: Not everyone can realistically cover 100 percent of college costs, even if they start saving before their children are even born. On average, tuition at a four-year public college increased by 37 percent from 2008 to 2018. In 15 years, four years of public college could cost nearly $200,000, and private colleges could cost more than $450,000, according to calculations based on recent rates of college cost increase.
What you can do today: Take a deep breath. You’ll be OK. Figuring out how much is right for your family requires a little nuance, but there are multiple strategies you can use to make college affordable.
Rather than “deciding” you’ll fork over $200,000 (or double that) without a plan for how you’ll get there, consider getting specific. Maybe you’ll pay for public school but expect your child to cover the difference if she wants to go private. Maybe it’s more realistic to pay for half the costs and expect your child to cover the other half in loans.
Perhaps most importantly, don’t get spooked by prices, because you may not have to pay the whole thing. “The sticker prices you’re seeing are not necessarily what you’re going to be paying,” says Joe Orsolini, president of College Aid Planners. “My goal is to take [families] from a $40,000 to $70,000 sticker price and get it to the low 20s.”
Just over 86 percent of first-time, full-time college students at 4-year schools accepted financial aid for the 2017-2018 academic year. The average financial aid for full-time undergraduate students came to $14,940 for the 2019-2020 school year.
What you can do today: Try out the government’s financial aid calculator, which can help you wrap your head around how much aid you are likely to receive (and how much you’re likely to be on the hook for).
Your best way to save for college will depend on various factors, like how much aid you expect to receive, your family’s income and whether you’re aiming to send your kids to an in-state, public school or a pricier private college. Orsolini recommends saving at least $25,000 to $40,000 before your child reaches college age, to make a four-year college financially viable. This assumes that you’ll qualify for financial aid, and that you’ll contribute toward tuition with savings plus whatever extra you can afford from your income—and that you’ll rely on student loans to fill in any gaps.
You might also consider the “2K Rule of Thumb”: Multiply your child’s current age by $2,000 for a ballpark of how much you should save. If you’re starting later, this can help you scale your contributions to make up for lost time. Some experts suggest aiming to cover about a third of college costs (assuming the rest will be split between scholarships, current income and loans).
What you can do today: Easy math. Multiply your child’s age by $2,000 for an estimate of what you should probably have saved so far. For a shortcut, see the handy chart we made, below.
If you’re able to contribute more than this, extra savings help protect against rising tuition and the possibility that you don’t get as much financial aid as you hoped. On the other hand, if money’s tight, don’t get discouraged. Start saving what you can and consider increasing the contribution when your income increases (and possibly asking family to chip in at holidays).
Starting as early as possible gives your money the most time to grow. If you saved $150 per month starting when your child was born, you could have $32,400 after 18 years, without factoring in any earnings. If we were to assume a 5 percent rate of return, that’d climb to about $52,000. Of course, investing doesn’t guarantee a return, and your rate of return depends on your investments and how the market performs.
What you can do today: Pause and really let that sink in. Starting early is likely to be the easiest way for you to hit your goals.
Once you start looking into education savings accounts, you’ll probably hear one number over and over: 529. Named for the section of tax code authorizing them, 529 plans are tax-advantaged savings plans designed for education expenses.
There are two types, a 529 savings plan and a 529 prepaid tuition plan. All 50 states and the District of Columbia offer at least one of those two types (Wyoming does not offer its own plan, but residents can join an out-of-state plan), and depending on where you live, you may be able to deduct both kinds of 529 contributions from your state income taxes.
Deductible 529 contribution limits vary by state. In 2021, you and your spouse can each give up to $15,000 per child before you face additional taxes for large gifts.
As with other investment accounts, the idea is to accrue interest and investment growth over time. The money in your account grows tax free, and if you use withdrawals for qualified expenses, you won’t have to pay federal taxes. In many cases, distributions for qualified expenses are exempt from state tax, too, although there are a few exceptions.
What are qualified expenses? For college students, tuition, fees, textbooks, and room and board would be considered qualified expenses for a 529 savings plan. Under the Tax Cuts and Jobs Act of 2017 (TCJA), up to $10,000 per year in private, public or religious elementary or secondary school tuition also counts as a qualified expense.
The tax-free growth on your 529 savings and the tax exemptions for most education expenses generally means you’ll end up with more money than if you’d earned the same rate of return in a regular mutual fund, which is subject to income and capital gains taxes. (If you withdraw money for a reason other than education, your earnings will be taxed and hit with a 10 percent penalty. California adds its own 2.5 percent penalty on top of that for non-qualified distributions.)
This kind of plan lets you purchase credits toward tuition and fees at today’s rates for a select list of colleges (often, but not always, public universities in your state). That means you don’t need to worry about rising tuition costs, but prepaid plans restrict where your child can use the funds and what the money will cover. Room and board, for example, typically isn’t covered. So you might need a 529 savings plan in addition to a prepaid tuition plan to cover other expenses.
If your child wants to go to a college that isn’t covered, any prepaid tuition plan will let you use funds toward tuition at other colleges or universities. Some state prepaid tuition plans pay out based on weighted average tuition and required fees for in-state public institutions, including community colleges (which are often cheaper, and can keep the average low). If your child attends a college other than the participating colleges in the prepaid tuition plan, the plan might pay less, so it’s best to choose this type of plan only if you’re fairly certain where your child will go to college.
One drawback of a prepaid tuition plan is this 529 option is harder to find. Only 10 programs are still accepting new applicants, and eight of them come with state residency requirements.
Another downside is that not all state governments guarantee the money you contribute. Florida, Mississippi, Massachusetts and Washington guarantee contributions with the full faith and credit of the state, meaning the state will supply funding if the program runs into financial difficulty. Other states may only promise to reach out to legislators if funds run short, and legislators are not obligated to act. If the plan’s financial sponsor can’t keep up with demand or the state’s investments underperform, the state may not have the funds to cover each student, making this a riskier choice than many parents imagine.
To be clear, 529 college savings plans aren’t guaranteed, either. But they’re not based on locking in a lower tuition rate, so they don’t seem to face the same underfunding struggles that prepaid plans do.
Although Roth IRAs are officially intended for retirement savings, Orsolini notes that they often work well for parents trying to save for retirement and college at the same time. That’s because early withdrawals from a Roth IRA aren’t subject to the usual 10 percent penalty if you use the money for higher-education expenses. You can also avoid taxes if you withdraw only contributions, not earnings.
Coverdell ESA plans are another, less popular option. As with 529 plans, contributions grow tax-free. Coverdell plans have the advantage of including a broader range of K-12 expenses, like uniforms or room and board at a private school, whereas 529 college savings plans only cover K-12 tuition.
That said, Coverdell plans only allow a maximum $2,000 annual contribution per child and you can’t use this sort of plan once you hit certain income limits. If you file taxes as an individual, your contributions face limits when your modified adjusted gross income reaches $95,000, or $190,000 for married couples filing jointly. As a result, they aren’t the best answer for many families.
What you can do today: Simply decide what type of account is right for you. That’s it.
You’re generally free to open a 529 in any state, not just your home state, although there may be tax benefits for going with your state’s specific 529. SavingForCollege.com offers a comprehensive listing of 529s across the country, along with reviews.
What you can do today: Create a calendar alert to sit down and spend a couple hours researching various 529 or other plans, and open an account. Trying to do everything all at once can be overwhelming, so you might choose a time when you know you’ll be unhurried and can really do it right.
You fill out a FAFSA form, providing information about your financial situation.
Administrators calculate your expected family contribution, which is how much you’ll have to pay out of pocket.
Depending on your age, you’ll have an asset protection allowance, which is a certain amount of savings that don’t get factored into the formula (because they don’t want to totally bankrupt your retirement). For the 2021-2022 school year, the amount for a two-parent home was $5,500 if you’re 40 when your child goes to college, up to $10,500 if you’re 65 or older.
Money in retirement accounts also doesn’t count, which is good news for you.
The rest of your savings are assessed at up to 5.64 percent, including money in any 529 plans. So, if you’ve saved $10,000 above and beyond your asset protection allowance, your financial aid package would only get dinged by up to $564.
Anyone telling you that a 529 education savings account will hurt you is essentially saying, “Don’t bother saving $100, because you’ll only get to use about $95.”
One important caveat: Encourage grandparents to contribute to a 529 plan you open, rather than creating their own. Funds from separate 529s will look like “student income” and take a much bigger bite out of your financial aid.
What you can do today: Decide on a basic savings goal. Even if it isn’t sky-high, think about what you can afford and make a commitment to contribute that much each month. Bonus points? Set it up through autopay so you know you’ll do it, no matter what.
If you have major debts that go to collection or if you have to file for bankruptcy, your child’s 529 education savings account should be largely protected, with a few exceptions. Contributions made in the last year aren’t protected from bankruptcy proceedings, and there’s a cap of about $5,000 on exempt contributions from the year before. Beyond that, though, creditors generally cannot touch your child’s 529 funds.
Most states’ 529 savings plans are available with either no minimum contribution or a low minimum contribution (typically $25 or less). So even if money is tight, getting started on college savings is likely an attainable goal. Whether you’re putting away $50, $150 or $1,500, the most important thing is to figure out a plan that fits for your family.
My own lesson from this? Don’t get scared off by college “sticker shock” or headlines about rising tuition costs. Instead, concentrate on making consistent, affordable contributions and aim to cover a reasonable portion of college costs. Time is on my side, and every baby step brings me closer to a bright future for my child.
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