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A complete guide to budgeting for college, 529 college savings plans and investment ideas
A new parent has a plenty of responsibilities to juggle: whether it's diapers or finances, it’s all about making tasks manageable. And, naturally, parents want the best for their children—from the safest car seat to the best preschool and all the way up to college.
But college can be expensive. That’s not breaking news. That said, college doesn’t have to be so expensive it's out of reach for your child. Below is some guidance on when and how to budget for your child’s education, including some options you may not have known about or considered previously.
The fear of making the wrong financial decisions can often lead parents to ignore college savings. Don’t become paralyzed with fear of the “what-ifs” and instead, focus on doing the best you can.
When is the right time to start saving for college?
Birth. Sure, it can feel like a lot to put money away for a child that has only done so much as cry and sleep, but it’s never too early to start planning. Financially, babies can change your plans a lot. It’s important to update your financial plans consistently, so you don’t miss out on important changes. Practice sticking to your baby budget, so you can allocate your money to long-term things that matter. Higher education. College. University. Whatever you want to call it, it’s critical to plan for.
As soon as you can. The sooner you start putting money away for college, the more spread out your payments need to be, and the more interest you can earn on your savings. Don’t fret if you haven’t started yet! Today seems like a great time to start. We’re here to help with your budgeting. Pop into the College Savings theme in the app now to learn how you can start planning for your kids’ college now.
Savings plans to consider for affording college
Building up your children’s college funds can be nerve-wracking. Here’s what you should know about preparing your payments to minimize your stress.
529 plans
You may be asking yourself: should you set up a 529 college savings plan for your child? Psst: check this guide out to evaluate the benefits of a 529 college savings plan, and if it's right for your family.
Mutual funds
With thousands of options available, no investment cap, and no requirement on how you can spend the money, mutual funds can provide you with flexible investment and savings options. However, your earnings are subject to annual taxes and are taxed as capital gains when you sell your shares. Just like anytime you invest in the capital markets, depending on the mutual funds holdings, you will see some volatility.
Custodial accounts
There aren't any investment limits or controls on how you spend your money in custodial accounts under the Uniform Transfers to Minors Act (UTMA). Something unique about this is that the student will, once they reach legal age, gain the rights to the account. This grants them the ability to use the money at their own discretion. (That’s why it’s important to start teaching your kids about finance young.) Custodial accounts do not have the tax benefits that other education plans have, so take note of the pros and cons in custodial accounts.
Roth IRA
These can be a helpful savings option for college: the government waives the typical 10% penalty for early withdrawal on earnings when you spend the funds on higher education. However, these accounts get capped easily and some higher income brackets are ineligible for contribution.
Educational savings accounts (ESA)
These are savings plans that help you to save and pay for education expenses from kindergarten through college. Account earnings can grow tax-deferred and withdrawals are tax-free, when used for eligible expenses.
Ultimately, how you decide to finance your child’s education depends on which method is right for you. Learn more about what the right college savings plan is for your child.
Exploring other options
Possible Prepaid Plans
Some states offer extensive prepaid college savings plans. Essentially, this plan locks-in college prices and allows parents to prepay, either in monthly increments or lump sum amounts, starting as early as their birth. A major benefit of this is that even if the cost of college is greater than your savings, it will still cover the entirety of any instate College or University. But wait! There's more. (Cue the funny TV salesperson!) In the event your student attends an out-of-state or private college, the plan will cover the portion of tuition and fees equal to those of a public college in your state. This plan is backed by a guarantee from the State, so there is no default-risk on the use of your savings.
Participating states in this method of savings include: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington.
Community Colleges
Community colleges can be financially and academically sound options. And, if your child goes the community college route, remember that It’s not all or nothing. Your child can go half-in. You can send your child to college on a better budget, with lower payments, if your child attends a community college for two years and then transfers to another college or university. This option gives the best of both worlds: financial stability, yet also a diploma from the school of their choice. Many community colleges even have direct enrollment programs with nearby public colleges that can make transferring seamless.
How to avoid student loan debt
Student loans
There's lots of commotion around student loans. That's likely due to the overwhelming student debt in our country, where average student loan debt is over $30,000 per borrower. No parent wants their child to be facing student loan debt as soon as they enter the adult world. However, sometimes taking out student loans is necessary, inevitable… and even a beneficial choice.
Federal student loans come with competitive fixed interest rates and many repayment methods. This makes them a reliable form of debt and easy to incorporate into your financial plan. Even though most types of debt don’t offer tax benefits, nor are they secured by collateral, student loan interest can be tax-deductible. (Just be sure to consult a tax advisor on the regulations for where you live!)
Undeniably, student loans can be daunting. Don’t worry, you’re not alone… we’re here to help. Whether it be figuring out how to refinance student loans, creating a plan for how to pay off your student loans, or in general; paying off debt when cash is tight, We can help you maximize your budget while minimizing your stress.
Take a breath, start as soon as possible, explore all of your options, and know that there is always a way to make a college education possible for your kids. We’re here to help you reach financial wellness and financial security in just a few minutes a month. Pop into the College Savings theme in the app now to learn how you can start planning for your kids’ college now.