A lot of dedication goes into saving money for college and your child’s future. And with rising college costs and growing student debt levels, it can feel like an unachievable goal to afford college. Fortunately, there are several savings plans for college that help families save money for higher education. With the right plan and the right information, college tuition may be more affordable than you might think.
At RaptorFi, our goal is to simplify the process of saving money for college and making higher education affordable to all. This guide explains the many options that you can choose from when saving for college.
1. 529 College Savings Plan
This is perhaps the most popular, and certainly the most well-known savings plan for college. It allows your family to put money in an investment account that can be used for various K-12 and college educational expenses. Plans come with tax and financial aid benefits.
Like a Roth IRA, 529s works by investing your after-tax contributions in mutual funds or similar investments. The growth of your 529 contributions will depend on the market performance of your investment
Almost every state has a 529 college savings plan available and each state sets their own plan specifications. Families can invest in any state’s plans, not just their own. This means you can compare plans and choose one that offers you maximum benefits. Some of the benefits can include state income tax deduction, tax-deferred growth, and tax-free withdrawals if used for educational expenses.
A 529 Plan is a good idea if…
- You are willing to accept the risks of investing in the market
- You are interested in tax benefits
- You wish to avoid beneficiary age-restrictions or enrollment period limitations
Looking for a 529 plan to help you with saving money for college? RaptorFi has partnered with Raymond James – CR Wealth Management who is a responsible broker of 529 plans.
2. 529 Prepaid Tuition Plan
Unlike the 529 college savings plan, a 529 prepaid tuition plan’s value doesn’t depend on market fluctuations. What you add to the account today will be what is there tomorrow. A 529 prepaid tuition plan allows you to prepay all, or part, of an in-state college’s tuition.
For better or worse, the prepaid tuition plans are tied to the price of tuition at the time of opening the account. If prices go up, then you benefit by paying the lower tuition. But in the rare event the cost of tuition goes down, you won’t benefit from the reduced rate. You’ll have to pay the original cost.
Does your child want to go to a private or out-of-state college? There are options for that as well.
A 529 Prepaid Tuition plan is a good idea if…
- You’d like to lock in current tuition rates
- You are looking for state-backed plans
- You wish to take advantage of tax benefits such as tax-deferred account earnings
3. Coverdell ESA
A Coverdell Education Savings Account (ESA) is a special type of tax-deferred college savings account. In this plan, individuals fund the educational expenses of a designated minor beneficiary. This beneficiary does not necessarily have to be related to the account holder.
Coverdell ESA benefits include tax-deferred growth and tax-free distributions for qualified educational expenses. But for every pro, there is a con. Funds can only be deposited into the account before the beneficiary’s 18th birthday. Additionally, while a beneficiary is allowed to have multiple Coverdell accounts, the combined amount contributed across all accounts for a beneficiary is $2,000 per year.
A Coverdell ESA is a good idea if…
- You would like to sponsor an unrelated beneficiary by paying their college costs
- You earn an income lower than the maximum limits ($95,000 for single households, $190,000 for married households)
- You are saving money for college for multiple beneficiaries
4. Personal Savings Account
If you prefer a more traditional approach to savings, a personal savings account is always an option. There are several benefits to saving money for college using a personal savings account. It allows you to deposit as much as you want to and also allows you to decide how the money is spent. With a personal savings account, there are no restrictions on the amount deposited or what the money can be used for.
On the downside, personal savings accounts have lower, fixed interest rates. Moreover, you don’t get any tax benefits when saving money for college using this option.
A Personal Savings account is a good idea if…
- You want more flexibility and fewer spending restrictions
- You don’t mind passing on tax benefits and market gains
- You are confident in your financial saving habits
How Much Should I Be Saving For College?
‘How much should I be saving for college’ is one of the first questions families need to ask themselves after selecting their preferred savings method.
While there’s no one-size-fits-all approach or magic number when it comes to saving money for college, there are a few important tips to keep in mind.
Consider The Cost of College: Net Price vs. Sticker Price
Firstly, let’s talk about the cost of college, and how it may be different than you expect. For example, Yale’s advertised price tag (also known as the sticker price) is $75,166 per year. But did you know that very few families pay that whole amount? In fact, the average annual institutional grant at Yale is worth $49,051 and 51% of Yale students receive an institutional grant.
The cost you really want to pay attention to is your family’s net price. That’s what you are likely to pay after scholarships, grants, and other forms of aid are taken into consideration.
Set an End Goal
You can’t hit a target if you can’t see the target, right? So instead of aiming for an undefined number choose a concrete number. Base it off of the average cost of college or get more personalized estimates by using a college cost calculator. Saving money for college is easier when you have a specific number in mind.
Commit to Monthly Payments
Once you have that goal amount, it’s time to break down the monthly costs. How much will you put into a savings plan or account each month? As much as possible, try to set a specific number and commit to contributing that amount every month to your chosen college savings plan.
Don’t Forget About Gift Aid
Thanks to financial aid opportunities like scholarships, you likely won’t have to pay the total cost of college all on your own. While it’s key to save as much as you can for your student’s higher education, remember that there is gift aid out there to help fill the gaps.
When To Start Saving For College
When should you start saving for college? The short answer: start today.
Financial experts advise families to start saving money for college before the child is even born. Some recommend asking for college savings gifts for baby showers or even for weddings. College is an expensive endeavor, so the earlier you start saving, the better.
What if your kid is already ten and you haven’t started saving money for college? Is it too late? If you don’t already have a savings plan, start one today. It’s never too late. No matter when you get started or how much you can save, it will ultimately make it easier to cover the cost of college.
What if You Didn’t Save Enough for College?
There are many reasons why a family might not have saved enough for college–unexpected medical costs, financial woes, big life changes, lower income etc. Whatever the reason you haven’t saved enough, it’s ok. Don’t give up hope that you may not be able to afford the college tuition. The fact is you’re not expected to pay the full cost of college completely by yourself. There are many ways to make college more affordable—from getting lower in-state tuition to getting free financial aid in the form of scholarships.
Let’s break down how to make college more affordable, even if you haven’t managed to save as much as you hoped to.
Tips For Finding an Affordable College
There are many factors to consider when selecting a college, and the cost is often at the top of the list for students and their families.
- Look for the right fit: Finding the ideal college fit can actually save you money. By finding the right college for your student, they’re more likely to graduate on time, saving money in tuition fees. They are also less likely to consider transferring, which can add extra semesters and increase the cost. The right college will often also offer financial aid, making it reasonably affordable and within your financial means.
- Prioritize in-state options: Attending an in-state college is one of the most popular ways to lower the cost of tuition significantly. Public colleges typically offer in-state students a lower tuition rate.
- Consider community college first: Another option to consider attending a community college for 2 years. After 2 years, you can transfer to a more traditional college to finish out your bachelor’s degree.
- Compare financial aid offers: Every school calculates financial aid eligibility differently. Attending the school that offers the most in financial aid can make it more affordable instantly.
Types of Financial Aid
Knowing that there is financial aid available can come as a relief to families who haven’t saved enough for college. Financial aid can come in the form of scholarships, grants, work studies, and federal student loans among others. Applying for as much aid as possible will reduce the potential for student loans, or lower the amount of debt taken on.
Gift Aid – Gift aid comes in the form of merit scholarships, need-based scholarships, and grants. This type of financial aid is free. It doesn’t have to be paid back, making it the best type of financial aid available.
Federal Aid – The federal government offers very generous financial aid packages to cover the cost of college. They have many programs set up to help students and their families pay for college. Each of these programs has its own terms, conditions, and benefits. Filing the FAFSA is a mandatory first-step to qualify for federal aid such as grants, work-study programs, and federal student loans.
Types of Student Loans
Even with college savings and scholarships, many families turn to student loans to cover the rest of the costs. It’s key to know your options when it comes to student loans, as the choices have far-reaching financial impact.
Federal – Federal loans should ideally be your first choice when borrowing money for college. Federal loans have lower interest rates, more flexible repayment plans, and the option for student loan forgiveness.
Private – There are numerous student loan lenders available, each with their own offerings, pros/cons, and eligibility requirements. Make sure you shop around to find an option that works best for you.
Final Thoughts On Saving Money for College
Though saving money for college can feel like a monumental, and sometimes intimidating, task, it is possible to attain this goal. The key is to start early, do your research, make a plan, and stick to it.
RaptorFi makes it easy for you to compare your personalized rates with our lending partners and potentially lower your monthly student loan payments and save money.
