Print Posted on 11/09/2017 in Financial Planning

How To Save For College

How To Save For College

Over the years more and more people are pursuing higher education. Going to college has become a mainstream stepping stone leading to adulthood. 

However, these experiences come with a hefty price. Whether you’re pursuing a degree at a private or public university, covering the cost of tuition can be challenging. 

It’s why so many students graduate with significant amounts of student loan debt. Currently, the average student graduates with $37,172 in debt.  

Graduates accumulate so much student loan debt because they don’t have the means or savings to cover the cost on their own. While you don’t have to pay the entire yearly tuition cost up front, you need to make payments for each semester or quarter that you attend.

With 33.4% of Americans completing some form of college degree, more and more people are struggling to cover tuition costs. It’s safe to assume that this will continue to rise as more employers require candidates to have college degrees. Obviously, that will lead to more people struggling with student loan debt.

You can get your degree without accumulating massive amounts of debt. The key to doing this is by being prepared and to start saving now.

Many people begin saving for college as soon as they have a child, but it’s never too late to start. Even though college may seem far in the distance, tuition is expensive and saving for that expense takes time.

Read on to learn some of the best strategies you can use to save for college and reduce your college expenses once you’re there.

Ways To Save For College

Open A 529 Savings Plan

One of the best ways to ensure that you’re prepared for tuition costs is to set up a 529 savings plan. This is a tax-advantage account that helps save for future tuition costs. 

Typically, the plan allows the account holder to establish an account for a beneficiary (generally your child), and use the savings to pay for college expenses such as tuition, room and board, and books.

The contributions that you make to this account can be invested in stock or bond mutual funds, or in money-market funds. 

What’s advantageous about this plan is that the earnings accumulated aren’t subject to any federal taxes. Something to keep in mind though is that the money in the account can only be used for qualified college expenses.

A 2015 FDIC study found that nine million American households used no banking services at all. For these individuals, opening general savings accounts let alone a 529 plan can seem extremely complex and intimidating. 

With over 100 savings and prepaid 529 plans available, choosing the right plan can be difficult.

That’s a huge misconception as opening a 529 plan is fairly simple. To help relieve any stress, we’ll walk through the process of setting up this type of account. The first step to finding the right plan is to choose a savings plan, prepaid plan, or even both. 

Savings plans are similar to 401(k)’s in the sense that they participate in securities markets by investing in stocks and bonds. On the other hand, prepaid plans are similar to pensions, which generally grow at a sponsored rate and are mostly limited to state residents and in some cases schools.

Your next step will be to choose either an in-state or out-of-state plan. Depending on your state tax benefit, choosing an in-state plan may be a better option. To find out how much your tax benefit is worth, you can use this online calculator

Going forward, it’s important to realize that you might not be able to choose the absolute best plan. You can always transfer to a different plan in the future.

When comparing plans, make sure you go to the plan website to find out what the documentation requirements are. Each state requires different information in order to open an account. For most plans, you should expect to provide your personal information as well as the information of the beneficiary.

In order to ensure account security, you’ll need to name a successor account owner. This is a person who will assume ownership of the account in the event of a death. Make sure you do this so that you’re prepared for the worst.

For most plans, you’ll have the ability to complete everything online. Additionally, you’ll be able transfer money directly from your checking account into your 529 plan.

As you’re choosing the type of account to open, there are generally four options that you should consider. You should choose either an Individual account, UGMA/UTMA or Custodial account, a Trust account, or a Business or Other Entity account.

Something to keep in mind is that only a few plans offer joint ownership. If your plan doesn’t, then your spouse won’t have access to the account. In order to protect yourself in the future, you should name a Power of Attorney to minimize risk.

After you’ve chosen a plan it’s time to choose an investment strategy to help the account grow. Most individuals choose an age-based portfolio that corresponds to the age of the beneficiary.

These portfolios diversify investments and typically become more conservative strategically as the beneficiary reaches college age. This protects against market fluctuations and ensures that you’ll have enough savings to cover the cost of college.

While you do have the option to make investments on your own, we strongly recommend working with a financial professional to ensure that your portfolio will have long-term success. 

Once you’ve chosen a college savings plan, it’s time for you set a savings goal so that you can cover college expenses.

Set A Savings Goal

The process of setting up a college savings plan can be exhausting. After choosing a plan, many lose sight of the actual purpose of the account. The best way to make sure that your plan is on track for success is by setting a savings goal.

Setting a savings goal can vary greatly on the type of university that your child plans on attending. A recent study found that the average yearly cost of attending a public or private university was $24,610 and $49,329, respectively. 

Depending on the type of univeristy, your costs will vary and so will the amount that you need to save. You’ll need to adjust your savings goals based on the type of school your child plans on attending. This can range from a public or private four year program to a two year program.

There are many tools that you can use online to help estimate college expenses. We recommend using this calculator to get a better idea of what your savings goal should be.

A great strategy that you can used to make sure that you’re on track to meet your savings goal is the 4k rule. With this strategy, parents multiply the age of their child by $4,000 to find the amount they need to save.

The best way to ensure that you reach your goal is by making monthly contributions to your college savings account.

You should take advantage of the many online banking tools to set up automatic transfers to your college savings plan. This will make the saving process easier for you as you won’t need to make transfers on your own time.

Even if you’re not a high earner, contributing monthly to a college savings plan adds up. For example, if you make monthly contributions of $25 until your child reaches college age, you’ll end up having saved $8,000 assuming a standard 5% interest rate.  

Once you’ve decided on the amount you plan to contribute monthly to your college savings plan it’s crucial that you stick to it. Being consistent in your contributions is the key to ensuring that you’ve saved enough.

In addition to starting to save for college early, there are a number of other ways that you can save on additional expenses. 

Saving Once You’re There

Even if you’ve saved enough to cover the cost of tuition there’s no reason you should pay for more than you need. While in college there are a number ways that students can save money.

One of the best cost-saving opportunities to take advantage of are student discounts. For most universities, students can use their campus ID at many of the surrounding businesses. 

Typically, you’ll be able to get student discounts at restaurants, museums, and movie theaters. Most establishments will advertise their student discount, but if they don’t you should ask anyway. You could end up saving twenty percent on a purchase.

A huge recurring expense for college students are textbooks. Depending on the classes you’re enrolled in, you may have to buy a book retailing at $200. Over the course of four years the cost of books adds up substantially.

One great way to reduce your textbook expenses is to take advantage of rental opportunities. Most campus bookstores will offer textbook rentals, but if not you can always rent from Amazon or Chegg.

Something to keep in mind is that these books are not yours and you should return them in good condition. Failure to return on time, or returning a damaged textbook can lead to additional charges. Assuming you return your items on time, you can save up to 90% on textbook costs.

Another great way to save money while in college is to remain in student housing. Depending on the school, many students have the option to live off-campus after their first or second year.

The prospect of living in your own apartment with your friends is exciting and can be extremely tempting. But with that freedom comes expenses, which are generally more than what you’d spend on student housing.

The amenities offered by student housing can easily be overlooked. Yes, there may be a communal bathroom, but something to remember is that you won’t have to pay the utility expenses that you would have in off-campus housing.

Those looking to reduce their living costs further should consider becoming a resident advisor. While this role comes with responsibility, you’re living expenses will be covered by the university.

In addition to room and board, a portion of your tuition is reserved for your meal plan. Most schools have different meal plans based on how frequently you plan on eating in the dining hall.

Maximizing your savings by using your entire meal plan ensures that you’re getting what you paid for. In most cases, meal plan money doesn’t roll over from year to year. Essentially if you don’t use your entire meal plan balance, you’re throwing money away.

With delivery apps such as Grubhub and Postmates rapidly spreading, more and more college students are taking advantage of the convenience offered by these services. Don’t fall into this trap. Constantly placing delivery orders will increase your expenses rapidly.

Instead of making frequent delivery purchases, use the money already set aside in your meal plan. It may not fill your late night sushi craving, but it’ll help reduce your overall college expenses.

Start Saving Now

Unless something drastically changes, the cost of education is only expected to increase. As a result, more and more individuals will struggle to cover the expense.

Many individuals turn to student loans to help with tuition costs. That’s why student loan debt has become the second largest debt category in the United States. This doesn’t have to be you if you’ve prepared properly.

Even if you haven’t started saving for your child’s education it’s never too late to start. Opening a 529 college savings plan is the first step followed by years of consistent monthly payments until your child goes to school.

Once in school, there’s no need to stop looking for opportunities to save. Take advantage of resources available to students like discounts, housing, textbook rentals, and meal plans.

Saving for college is a long process, but by following the steps outlined in this post you’ll be well on your way to saving enough to cover education expenses.