When strategizing for college expenses, approach with an open mindset, and explore all possibilities. For instance, is your child open to the idea of attending a state university instead of a private institution to minimize costs, or would they be comfortable initiating their journey at a community college and transferring credits to their dream university later?
Typically, college expenses have seen a surge roughly double the rate of inflation, rising from 5% to 8% per year. Considering the already steep costs, devising a prudent education finance plan is essential to balance these expenses while also preparing for retirement. For a clearer understanding, consider the national average expenses given below.
For a clearer understanding, consider the national average expenses given below.
Several other factors can potentially influence the total cost of education. These include:
A 529 savings plan is a special type of savings account, crafted precisely with the aim of accumulating funds for the beneficiary’s educational expenditures. Funds contributed to a 529 savings plan have already undergone taxation, and the account provides the benefit of tax-free growth. Any withdrawals made for eligible educational expenses, such as tuition fees, textbooks, or room and board, are also tax-free. While there are no restrictions on the annual contribution amounts to these 529 plans, lifetime maximum limits per beneficiary do exist. These limits vary by state and typically range between $235,000 and $529,000.
A Coverdell Education Savings Account (ESA), previously referred to as the Education IRA, shares some characteristics with a 529 savings plan, particularly the feature of tax-free growth for contributions. However, there are certain limitations unique to the Coverdell ESA. Namely, families are only permitted to contribute a maximum of $2,000 annually per child. Furthermore, the accumulated funds must be utilized before the beneficiary reaches the age of 30. One notable advantage of the Coverdell ESA is that it typically provides a broader range of investment options compared to a standard savings account.
The Private College 529 Plan stands as the sole federally sanctioned 529 prepaid tuition plan, allowing families to economize their educational expenses at hundreds of private universities across the country. This is achieved by securing the current rates of tuition and fees, which are then assured by the participating institutions, thereby providing a hedge against future cost increases.
Most students regard financial aid as an invaluable tool in funding their education. Even before your child has chosen their preferred university, you both can get an estimate of potential financial aid by completing the Free Application for Federal Student Aid (FAFSA). Some of the most common forms of financial assistance are detailed below:
If you choose to apply for financial aid, federal student loans are likely to form part of the offered package. Therefore, it’s crucial to understand the categories of loans and their terms and conditions before allowing your child to commit to any loan. There are principally two kinds of student loans: federal and private.
Colleges may provide scholarships and grants as part of their financial aid package, or students can independently apply for these. Scholarships are often merit-based, awarded to students for their accomplishments. Grants, on the other hand, are primarily based on your family’s financial status and your specific needs. Both scholarships and grants are competitive, necessitating thorough research, but the effort is worth it.
Federal work-study programs offer students the opportunity to work part-time while studying. If included in a financial aid package, work-study allows your child to hold on-campus jobs with flexible hours. Notably, the income from work-study jobs is not required to be reported on the FAFSA and therefore doesn’t influence the following year’s financial aid eligibility.
If you own a home, you could potentially tap into its equity to finance your child’s education. Moreover, the interest paid on a home equity loan is tax-deductible, making it a potentially more cost-effective option compared to other types of loans. However, these loans may not provide flexibility should your financial circumstances change.
Some parents might consider using their retirement savings to help cover their children’s college costs. However, it’s crucial to weigh the consequences before making this decision. For instance, if you withdraw from a retirement account like a 401(k) or a Roth IRA for educational expenses, you might face additional charges such as income tax or early withdrawal penalties. Plus, this could affect your retirement income in the future.
An alternate route some parents consider is utilizing cash-value life insurance to meet their children’s educational expenses. A portion of your premium payments in a permanent life insurance policy goes towards the cash value account and the death benefit. If properly structured, you can take out loans against your cash value, likely reducing the death benefit. The policy owner is free to use the loaned funds (the cash value) as they wish, including for educational expenses. Additionally, the cash value is not taken into account when calculating a student’s financial aid package.
However, life insurance might not be the most economical way to save money, as it could take some time for the cash value to surpass the cost of premiums. Moreover, annual fees for maintaining the accounts in good standing could accumulate.