Five smart ways to save money for your child’s education
College costs in the US have been rising for years and may show no sign of slowing down. Since 2000, the average cost of college tuition and fees at public four-year institutions has increased 179.2% and 124% at private four-year institutions.1 And in terms of opportunity, a college education is still the most reliable path to higher wages with college graduates estimated to earn $1 million more in a lifetime of work.2
So how do you pay for your child’s expensive but valuable education?
In looking at all ranked schools, the average cost of tuition and fees for the 2022-2023 school year is $43,350 at private colleges, $30,780 for out-of-state students at public schools and $11,610 for in-state residents at public colleges.3 Student loans can help cover those costs, but with careful planning, you can reduce the amount of money you’ll need to borrow.
Here are five ways you can start planning for your child’s education right now.
1. Start saving with professional guidance
Time is your secret weapon when saving for college. If you set aside $100 a month beginning when your child is born, compounded at a relatively modest interest rate of 4% a year, it will add up to $24,000 in 18 years.4 Get guidance from a financial professional early on: A financial strategy will help you put away money in gradual, less noticeable increments, while still allowing you to plan for life’s other expenses. A financial professional can help navigate different options to fund your child’s education, and help you properly declare all your assets on financial aid forms.
2. Use a savings plan
Sponsored by state governments, 529 plan accounts were designed specifically to encourage college savings.5 Money must be set aside in the plan from your already-taxed income, but the interest that money will collect isn’t taxable.6 And when you eventually withdraw the money, it won’t be counted as taxable income if it’s spent on eligible education expenses. A Coverdell account offers many of the same features as a 529 plan, but applies to elementary and secondary schools, too. There are stipulations, contribution limits, and age ranges on each type of savings plan, and even on the variety of investments you can pursue, so you should turn to a pro for help.
You might also want to consider whole life insurance. You already know life insurance is an important way to protect your children if you should pass away, but a whole life insurance policy offers the added benefit of building a tax-efficient cash-value asset that you can later use to help pay for education costs.7,8
3. Ask for gifts
It may not have the same impact as watching a child cuddling a plush toy, but grandparents may be happy to contribute to their grandchild’s educational goals on gift-giving occasions. In fact, contributing just one Social Security payment a year into a 529 fund may add up to a helpful amount of money in 18 years' time. Grandparents may also gift money tax-efficiently to pay for a whole life insurance policy for their grandchildren to help ensure they’re financially protected when they are gone.
4. Hire a college advisor
It’s important to know what types of financial aid need to be paid back and which don’t. Grants, awards and scholarships are essentially free money to help fund your child’s education, and a professional college advisor can help you navigate the options and apply for the help that’s available to you. Certified professionals charge for their help researching colleges, filling out admissions forms for financial aid, and interpreting the financial aspects of acceptance and award letters, and their guidance may prove invaluable. Different schools may have school-specific admissions forms for financial aid. A college advisor can help you know how to populate your College Scholarship Service Profile (CSS) for non-federal financial aid, and your Free Application for Federal Student Aid (FAFSA®).
5. Think outside the box
In-state public colleges often charge the most affordable tuition, but there may be significant grant and scholarship funding available at lesser-known private institutions. There is also a staggering variety of scholarship funds, even for those who aren’t athletically or academically qualified. There may also be awards for college-bound students within your specific community, religious group, or social group. Even if you don’t hire a professional college advisor, your own research time can pay off, expanding and suggesting educational directions that your student might not otherwise have pursued.
With enough research, you may also uncover some non-traditional methods of putting money away for college, like linked credit cards, which reimburse you at 2%, payable directly into your 529 account.9 Make sure you explore all possible avenues to uncover opportunities you may not know are out there.
Whatever methods you use to save for college, it’s important to monitor your financial strategies annually. Many government limits, including income ceilings and tax allowances, do change over time – often for the better. The most important thing is to save money for kids’ college and to plan with optimism for your family’s future. Remember that the more time you give the savings to work, the more options you’ll be making possible for your kids.