The Costs of Higher Education
November 6, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
Having children and starting a family is a costly endeavor. The cost of children continues to rise compared to what it was in decades past. From birth to age 18, the cost of raising a child is roughly $288,000, which doesn’t include the price of college.
College is costly, and the prices continue to rise as college becomes more of a standard practice. Whether college is right for your child or not, you still should be prepared when it comes time to make this decision. Here are some ways you can start to save for a college education.
Ways to Save
The most widely used college savings plan is called the Section 529 Plan. A four-year court battle fought to seek relief from the IRS when making savings into the plan. This court case prompted Congress to provide tax exemption for college savings options.
There are two forms of the 529 plan: prepaid tuition and 529 savings plans. Every state has a 529 savings plan. Only some states offer prepaid tuition plans, however, with only eleven states having the option. These states include VA, MD, MA, MS, FL, WA, MI, NV, IL, PA, and TX. Money put towards the prepaid plans is credit purchases against future tuition costs secured at the current levels. Prepaid plans have less flexibility because they apply to in-state tuition only at public universities.
529 plans can be seen as similar to 401 (k) plans. A key difference is that 529 plan contributions are post-tax, but withdrawals are tax-free as long as they are used for educational expenses.
Some more options for college savings include the Coverdell Education Savings Account (ESA) and Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA) accounts. These can be employed with the 529 plan, but both options can have contribution limits or tax complications.
How Much to Save for College
Predicting the total amount of money college will cost you is impossible. This is why it’s essential to estimate the amount as best as possible based on previous data. Tuition inflation is typically 7.5%. The limit many people run into is how much they can contribute to the 529 plan.
As mentioned before, the prepaid plans help make the tuition costs more predictable, but many other factors go into the overall price of college. These accounts also narrow your child’s options to a particular school when choosing plans that plan for in-state tuition.
While you should be prepared to save for college, there are also financial aid, student loans, and scholarships that can decrease the overall cost of attending college. Your child also could work during the school year and summer breaks to help save to contribute to the amount they’re paying for school.
What to Be Aware of When Saving
Your saving for your child’s educational expenses does not mean you should neglect to save for retirement or other endeavors you would like to do during your lifetime. Not every child will attend college. Therefore, it’s essential to be able to save for many different aspects of your life.
College savings options have many different avenues and challenges depending on the route you decide to go. From account limitations, contribution limitations, choice limitations, and more, each college savings option could not seem like the one for you. With help in saving for college, talk to someone from Complete View Financial today.