Most high-school graduates today are heading off to college to earn a degree. However, college degrees can be extremely expensive, and are a big burden for many families to bear. Saving for college is often something that gets postponed and tends to sneak up on people.
Most families get wrapped up in handling day to day expenses and dealing with budget challenges, often not getting to college savings until the kids have reached high school age. This doesn’t leave a lot of time to save the required funds, which puts families in a tight spot trying to save a lot of money in a short amount of time. Here are several ideas to help families save for college education more effectively.
1. Set up a Section 529 Plan & Accept Gift Contributions
Using a Section 529 college savings account, you can contribute to your child’s college savings, and gain access to a lot of tax advantages in the process. Once you have the 529 account set up, you can invite friends and family to donate to the account. Their donations to this 529 plan are tax advantaged contributions in most states that can potentially save them money on taxes. These contributions remain tax advantageous even though they are not for the donor’s own child. Furthermore, if wealthy grandparents would like to minimize their estate tax liability, they can make annual contributions to the 529 account to save on that as well.
One notable advantage of the 529 plan is that the beneficiary has no legal rights to the account. Rather, the parents have full control over the account, thus guaranteeing that the funds will be used entirely for their intended purpose. While contributions to a 529 plan by the plan owners (parents) are not tax deductible, they do come with a number of various tax benefits. These contributions will be able to grow free of federal taxes and will not be taxed upon withdrawal when used to pay for college education. If you were to simply use an investment account with mutual funds and stocks, you would pay taxes each year on gains, so 529 plans provide a major advantage here.
There are a lot of credit cards that come with various benefits and rewards, but wouldn’t it be nice to find one that issued its benefits in the form of college tuition savings? Upromise is a program that gives rewards for shopping at specified retail stores in the form of contributions to a college savings account that is set up for your child. The program is completely free to join. The best part about this program is that you don’t need to be the one who makes the purchases. You can send invitations to your friends and family, and anyone can activate their credit and debit cards to link to your account so that they can all contribute a bit to your child’s college savings account with each qualifying purchase.
3. Prepaid Tuition Plans
A common frustration that plagues parents trying to save for a college education is the very low interest paid on most short-term investments. Oftentimes investments in a low-interest rate environment will only earn as little as 1-2 percent. There are a lot of other higher earning investments out there, but parents may be leery of investing in stocks or other higher-risk investments which could potentially produce more growth.
Prepaid college tuition plans provide an excellent alternative to regular fixed-rate accounts, because they typically grow at the rate that the tuition rises each year. This amount is usually only 4-6 percent, which is more than double the rate of those lower 1-2 percent low-risk investments.
4. Take Advantage of Existing Life Insurance Policies
Generally speaking, it is not considered a good idea for parents to use a life insurance policy as a form of short-term savings or investment towards college tuition. However, if you have an existing whole life insurance or cash value policy, you switch over to a term life insurance policy to reduce what you pay in premiums. You can also withdraw money from the existing policy to use for your child’s college savings plan, or better yet roll it into a 529 plan as mentioned above.
5. Get Two More Years to Save
If a four-year college degree isn’t necessary for your child, you could consider dividing it up with two years at a local community college and two years in a university. This could save you a tremendous amount of money, while giving you two additional years to contribute to the child’s college savings account. Your child could also get a part-time job during those two years and begin contributing to their own college tuition fund in addition to your own contributions.
One major benefit of this is that it will give your child some additional time to mature and learn responsibility, while also helping them to value their own college education. Kids who participate in funding their own college education will tend to value it and take it more seriously.
During these extra two years and the years preceding them, you could also use that time to find and research scholarship opportunities that could potentially help finance your child’s college tuition. Leave yourself plenty of time for this, and you may want to consider hiring a professional to help you fill out the applications.
Regardless of where you are in your college savings journey, starting now will help you get well on your way to funding a successful college education.