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Your Kids and College: How to Plan for Future Education Expenses
By: iTHINK Financial | Jan 24, 2018
Stop What You’re Doing and Start Saving Now for College
Your kids may be young, and it might be hard to think about their future 15 to 20 years from now, but it’s no secret that college is expensive, and tuition will continue to rise.
Over the past ten years, the cost of tuition has risen at more than double the rate of inflation, and on top of that, in the next 18 years, a four-year degree at a public university will cost almost $55,000.
But with a solid savings plan in place, you can help pay for your kids’ college tuition. Let’s take a look at how you can start saving for the future today.
The Average American’s College SavingsParents are currently saving for their kids, but most aren’t saving enough. Although 70 percent of parents plan to pay for their children’s tuition in full, they’re on track to fulfill only 29 percent of that goal.
With tuition climbing year after year, it’s vital to have a laid out plan. To achieve your goals of helping your kids earn a bachelor’s degree, a college savings plan, such as a 529 plan or a prepaid plan, is a great step in the right direction.
529 College Savings Plans
Even though 529 plans were implemented in 1996, only 68 percent of people are aware that they exist.
These plans are better than a standard savings plan or even possibly tapping into your retirement savings because of all the tax benefits they offer to the people who invest in them.
These plans are a sound investment because they’re not subject to federal capital tax gains and are not taxed by state government when used for education expenses like tuition, books or rent. In addition, residents in 33 states and Washington D.C. get the extra benefit of a tax break when they invest in these plans.
Prepaid College Tuition PlansA second option for college savings is a prepaid tuition plan. The concept for this plan says it all in its name—you pay for your child’s tuition now and lock in the price. This way you’ll be able to avoid any inflation or tuition costs that may rise along the way.
So, let’s say yearly tuition at a public university is currently $5,000. If you invest $5,000 right now into a prepaid plan, when your child eventually makes it to college, you’ll have one year of their tuition paid.
Similar to a 529 plan, money invested into a prepaid plan is usually exempt from federal taxes. A prepaid plan may or may not be the answer for you because currently only about a dozen states offer prepaid plans.
The $2K Rule
If you choose to invest in a 529 plan or to save on your own, it’s recommended that you use the $2,000 rule.
Here’s how it works:
Take your child’s age and multiply it by $2,000—that’s how much you should have saved right now to be able to cover half of all your child’s college expenses for a four-year degree at a public university. Using this rule, if your child is 5 years old right now, you should have $10,000, or $2,000 times 5, saved into the bank.
If you haven’t started saving, it’s not too late. Any and all money towards your child’s college expenses lightens the burden. Whether your child is 1-year-old or 15-years-old, you can start saving for their future today.
If you’re ready to start saving for your children’s future, you can invest in college savings plan through your state or a financial advisor. Make the call and speak with a financial expert or make an appointment and get on the path toward savings success for both you and your children.
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