As every parent knows, saving enough for a college education has gotten more challenging. Even with tuition increases slowing down in recent years, the costs for a higher education are among the fastest-rising costs in American culture today. With many states running deficits, they are unable to offer the same level of financial aid, which means more costs are passed on to students.
The Benefits of Higher Education
In today's highly competitive job market, a college education is a necessity. A college degree increases one's earning power significantly over a lifetime. According to the Hamilton Project, "the typical bachelor's degree holder earned about $1.2 million over a lifetime—about $600,000 more than the average high school diploma holder and about $300,000 more than the average associate's degree holder."
What are my college funding options?
Traditionally, grants and scholarships opened the doors to a college education. Stafford loans, Perkins loans, and PLUS loans may give families additional flexibility. But while grants and scholarships do not have to be repaid, student loans do. One way to avoid taking out loans and remain debt-free is to start saving for college as early as possible. The sooner you start, the more time your money will have to grow.
Here are a few popular ways to get a head start on saving for college:
- 529 Plans. Section 529 of the Internal Revenue Code allows for 'qualified tuition programs' to help offset future college costs. A 529 college savings plan lets you put aside funds for any eligible U.S. higher-education institution. These plans allow more significant contribution amounts than most other options and you maintain control of the assets.
- Coverdell Education Savings Account (ESA). A Coverdell ESA is a trust or custodial account that allows you to set aside up to $2,000 per year (from birth to the child's 18th birthday) for qualified educational expenses. Assets in the account must be used by the time the beneficiary turns 30 (with a few exceptions), but you maintain control of the account.
- UGMA and UTMA Accounts. You can also set up a college account for your child under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). Although federal gift tax will apply to contributions over a certain amount, there are essentially no contribution limits. Assets can be used for any reason at any time for the benefit of the named beneficiary and the beneficiary gains control of the assets at the age of maturity (18 to 21 years old, depending on the state).
Lower your debt and save more
Many parents find saving for college challenging, between childcare expenses, food, clothing that's constantly being outgrown, lessons, and the occasional vacation. But according to a CNN Money article, making a few small adjustments can go a long way towards lowering household debt and putting family finances on a more solid foundation. Here are seven ways to find funds for college:
- Pay off high-interest credit cards first. If you only pay the minimum monthly amount on your credit cards, you are being charged high-interest rates, plus additional fees if your payments are late. Interest and penalties can add up to hundreds of dollars each year per card.
- Renegotiate with credit card companies for lower rates. Some credit card companies charge cardholders excessive interest rates. And if you have a history of bad credit, rates can shoot up dramatically. Only keep cards that have a low APR (annual percentage rate) and refrain from using your higher-rate cards. Sometimes you can renegotiate with the credit card companies to reduce your current interest rate.
- Pay with cash or debit card. The less you carry on your credit cards, the better. Avoid adding more debt to your existing cards. If you don't have the cash or a debit card, think twice about purchasing something you don't absolutely need.
- Scale back discretionary spending. Make a list of your monthly expenses. Review everything from your cable package to your cell phone plan. Don't renew magazines you hardly read. Consider eating out less frequently, and pack a lunch to take to work.
- Keep a log of monthly expenses. Input all your bills on a spreadsheet or list them in a ledger. It's a great way to keep track of your spending habits and maintain a family budget. There are also many websites (such as Mint or MyRatePlan) that can help you save money or assist with personal finances.
- Use public transportation instead of driving. Gas can get expensive. Websites such as GasBuddy can find you the lowest gas prices in your area. Or consider taking the train or bus to work instead.
- Ride a bike on the weekend. Bike riding is great exercise and saves wear and tear on your vehicle.
Just enacting some of these simple suggestions can save you money. And this found cash could help you finance your child's educational future - which would be money well spent.
Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.
An investor should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.
Neither State Farm™ nor its agents provide tax or legal advice.
State Farm™ (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates) is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites hyperlinked from this page. State Farm has no discretion to alter, update, or control the content on the hyperlinked, third party site. Access to third party sites is at the user's own risk, is being provided for informational purposes only and is not a solicitation to buy or sell any of the products which may be referenced on such third party sites.