Parents who are planning to help put their children through college have a big task on their hands. Not only does the average price of a full year of college in-state and with room and board currently cost approximately $25,487 per year, but they’ll also have to balance other competing financial priorities like saving for retirement and building up their emergency fund.
While this can sometimes feel challenging, it’s not impossible for parents to successfully come up with the funding they’ll need. In this post, we’ll discuss 11 of the best available strategies.
How Parents Can Pay for College
Here are some of the most commonly used ways that parents can help pay for their children to go to college.
1. 529 Plans
529 plans are like retirement plans that are used to pay your children’s college tuition. Your contributions are invested for growth and then gradually moved to more conservative funds as your child gets closer to age 18 and will presumably go off to school.
Even though there are no upfront federal tax savings, the earnings will be tax-free as long as it gets used for qualified higher education expenses. The requirements are very flexible and can be anything for a variety of things such as tuition, room and board, fees, books, laptops, etc.
Every state has its own version of a 529 plan, and savers can pick which ones they’d like to use. Most states will give families a tax break when they file their state returns as long as the contributions were made to their state plan.
2. Prepaid Plans
Prepaid plans are when families can purchase semesters of college years in advance of their children attending. These purchases are generally good for any public university within the state.
Under the right inflation trends, prepaid semesters could end up being cheaper than what the true cost of college will be in the future. However, it should be noted that these plans are non-refundable and usually only cover tuition. The family would still have to pay for other major expenses such as room and board separately.
3. Early College Programs
If your child will attend a high school that offers an early college program, sign up! These programs allow students to take basic college-level courses during their junior and senior years that will help them to earn real college credits.
What’s even better is that the school (not you) pays for the classes. This can erase a year on campus and save the family tens of thousands of dollars.
4. Apply for Financial Aid
At the beginning of your child’s senior year, you should help them to sign up for the FAFSA (Free Application for Federal Student Aid). This is a government-sponsored application that will determine if they’re eligible for federal funding, grants, scholarships, etc. The FAFSA is how most students can apply and qualify for federal student loans.
You can sign up for the FAFSA for free at this link here. Note that it does take about one hour to complete and will require several important pieces of financial information. You’ll want to carve out a morning or afternoon, and really take your time making sure everything is entered correctly.
5. Save and Invest
Similar to other financial goals, parents can start saving a portion of their income and investing it for future growth. Just like saving for retirement, investments will utilize the power of compound interest to grow over time.
For example, a family that starts putting aside $100 per month and investing it for a modest 6 percent growth would raise $38,735 by the time their newborn is 18 years old. This means that by using this method they were effectively able to double the value of their contributions. Try this for yourself using this calculator here.
6. Apply for Scholarships
There are literally millions of scholarships out there. And what’s interesting is that every year boatloads of them go unused because no one applies for them.
Encourage your high school child to find them and start applying. A good place to start looking is with the guidance consolers office at their high school. Don’t forget to also check local community boards in your area.
7. Encourage Your Children to Save
There’s no reason your children shouldn’t have some skin in the game too when it comes to preparing for college. Urge them to get a part-time job and save their money towards this goal. Even if they’re only able to save one or two thousand dollars, it will help them to feel accomplished and vested in the process.
8. Invite Other Family Members to Help
If you’re stuck on what to tell family members to give your children for Christmas or birthdays, tell them to put money into their college funds instead. This can start as early as when they’re toddlers. In fact, if that money gets invested, then it could double or even triple by the time they’re ready for university.
9. Seek Out a Private Loan
If you’re still coming short on funding, even beyond what federal financial aid can provide, then there’s always the option to seek out private student loans. Private student loans can offer competitive rates and longer payback terms. However, borrowers won’t have the same benefits that come with federal student loans like opportunities for loan forgiveness or income-based adjustments.
10. Borrow Against Your Home Equity
If your house has appreciated significantly in value and you can afford the extra payment, another possible place to take out a loan is to borrow against your home equity. Home equity loans give you a lump sum payment and can generally be paid back between 5 and 30 years at a rate that is slightly higher than the current mortgage rate.
11. Take Out a 401k Loan
The last option when all else fails is to borrow against your 401k plan. Borrowers can use up to 50 percent of their savings (up to a maximum of $50,000). However, it should be noted that this option will inhibit the growth of your retirement savings.
Start Saving as Early as Possible
No matter which strategies you ultimately decide to go with, the key is to start planning as early as possible. Someone who begins the process right when their children are born is going to have a much easier time than someone who starts when they reach high school.
If you’d like to start saving for a long-term goal like college, then let Buxfer help you budget for it. Buxfer lets you create specific goals and project them into the future. You can also add this goal into your daily expenses and see how it affects the rest of your overall budget.
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