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The Smartest Ways to Save for Your Child’s College EducationGuest Contributor
As the parent of three older kids — one bona fide adult, one current college student and one high school senior — I can attest that “saving for college” sounds a lot simpler than it actually is.
First, it’s easy to procrastinate paying for an expense 18 years in the future.
Second, it’s daunting. With in-state public tuition averaging nearly $9,700 per year, it’s like saving up for a down payment on a house — and that $40,000 total (that is, if your student graduates in four years) doesn’t include room, board, books or travel.
Third, deep down, there may be a quiet voice whispering soothing words about expensive, easy-money loans...ready to bail you out, just in case.
The good news is that digital tools make it simpler than ever to choose a savings strategy and fund an education investment account. Even better news is that certain browser add-ons, such as Rakuten, make supplementing your savings easier.
The key to success is choosing and launching your college savings strategy now. Here’s how.
The first thing you need to do is figure out how much you’re willing to contribute to your child’s education — even if you haven’t had kids yet but want them someday. Once you have that target, calculating your monthly savings goal is much, much easier.
We told our kids that we could pay for four years of study at an in-state school. Anything beyond that they’d need to pay for themselves, either through scholarships, savings or loans. They could also opt to study for a couple of years at a community college and then transfer to a more expensive private school if they so chose. But the dollar amount we agreed to contribute remained the same, regardless of where they studied.
If your children are younger, you might be thinking, how am I supposed to know what college will cost in 10 o 15 years? The College Board can help. Customize inputs on their college cost calculator for an estimate on future costs and you’ll have a strong plan for where to start.
Once you’ve figured out what you’ll need to save, you can start the hard work of putting money aside. You’ve probably already heard of tax-advantaged 529 plans, but don’t hesitate to consider even more creative ways to save for college.
Here’s an example. Last year, we decided to put aside “cash back” rewards from our credit card and the digital platform Rakuten, with the idea that we could use this free money to defray out-of-pocket college expenses like travel and books.
Think that added up to small dollars? Think again. In just one year, we put enough money aside to fund books for two semesters, four roundtrip airfares to and from school, and a spring break trip to Florida. And that was just one year.
You can maximize these savings by automating bill payments using your credit card and always shopping online through a rewards platform. But be careful, because if you don’t pay your statement balance in full every month then the interest you’ll pay will offset the rewards you earn.
Other popular digital options to consider include:
You probably already know that automated transfers make the business of moving money easier, but have you considered tweaking how and when you automate?
Imagine you’re paid twice monthly. Your partner is paid weekly — or maybe earns freelance income paid sporadically. Instead of automating one large monthly deposit to your 529 plan, save fewer dollars more times per month. That makes managing cash flow easier.
Digital banking makes automatic transfers easy but don’t hesitate to upgrade how you handle the cash in your pocket. Smart habits to practice include:
For most savers, the 529 plan is the easiest and most cost-effective way to save for college. But if you’ve saved a considerable amount, can afford an attorney’s setup fees and want more flexibility, consider an educational trust.
When does this make sense? Perhaps you want more investment options than your 529 offers. Maybe you want to fund a gap year. And should you need money for an expense not reimbursable by a 529 — such as medical or travel expenses — an educational trust could provide the right workaround.
What happens when you still don’t have enough money saved for college?
It’s easy to qualify for education loans, but there are other options to consider. Home equity loans are often tax deductible. Retirement plan loans are another option, as are some life insurance plan loans.
But in general, the first five steps are your best strategies to pay for college. Just remember: you can’t start too soon.