Saving for your child’s college education might be at the bottom of your priority list. But when you consider the average student loan debt, you might rethink.
According to Student Loan Hero, college students in the class of 2019 graduated with an average of $29,000 in debt apiece. What’s more, Americans owe $1.64 trillion in student loans overall.
The good news is that you can start saving for your child’s college education today to help him or her start their adult life without so much debt. Check out this guide for some tips.
Start with the end in mind
The first and most important step is to determine the amount you need to save for your child’s college education. Calculate costs including transportation, tuition and fees, living expenses, room and boarding, and books. Once you calculate the overall cost, you can then develop a saving plan.
Sometimes it can be overwhelming to count the costs and think about a budget. Resources like CollegeData can provide helpful information as you work to understand your child’s cost of education.
Determine an amount to realistically set aside from each paycheck
The amount of money you contribute to your child’s education should reflect your income. It’s essential to set a saving goal and determine the percentage of a college education that you can realistically fund.
There are many formulas you can use to estimate the amount you can save. For example, the one-third rule suggests that you pay a third of your child’s college costs. Or use the 2K rule, where you multiply your child’s age by $2,000 to see if you’re on track. If your child is ten years old, for example, multiply $2,000 by 10. If you have $20,000 saved for college so far, you’re doing well.
Open a 529 college savings plan to save and invest tax-free
Another easy way to save for your child’s college education is to open a 529 college saving plan. A 529 qualified tuition plan allows you to save funds for future qualified tuition expenses tax-free. Most of these plans are sponsored by state agencies, educational institutions, or state governments.
The 529 program is crucial because it allows the account to grow without paying taxes. It will also enable you to withdraw funds tax-free as long as the money is used for higher education expenditure.
Set up auto-draft
Regardless of how solid your savings plan might seem, money can be tempting, especially when it hits your bank account and you have a list of endless expenses to settle. That’s why you need to figure out effective ways to put money aside and achieve your saving goals.
One smart method is to set up auto-draft. This helps you maintain a good saving plan without thinking about the money. Setting up an auto-draft program for your account can help automate payments so you’re not tempted to spend the money when it hits your bank account.
Ask your child to contribute
Saving for your child’s college education can be an expensive undertaking and sometimes seems overwhelming. While it’s fine to fund the savings account yourself when the child is a minor, encourage them to contribute once they’re old enough.
This will not only protect your finances but also help your child to work hard. Asking your child to pay the entire amount of their college education may not be realistic. But they can certainly pay part of the cost by getting scholarships, student loans, a job, or all of the above.
Use a Coverdell ESA
The Coverdell ESA offers you an alternative long-term method to save for your child’s education if you max out your 529 savings annual contribution limit. The ESA, or the standard brokerage account, works the same way as the 529 but comes with additional benefits. This account allows you to increase saving earnings tax-free as long as the money is used to cover educational expenses.
In most cases, the ESA funds should be used by the time a beneficiary is 30 years. Otherwise, fees, penalties, and taxes will apply upon withdrawal. Most importantly, these funds can be used for secondary, primary, and higher education. Alternatively, you can use your Roth IRA account for qualified college expenses.
Saving for your child’s education can be challenging. But it isn’t impossible. Implementing and following a realistic saving plan can help you achieve your saving goal. The six ways mentioned above are some of the most common methods to save for a child’s college education.
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