With college tuition increasing every year, saving for college costs may seem like an impossible undertaking. Almost every family in America ends up taking federal and private student loans to fund college tuition. If you’re thinking taking loans and paying them back at a later date is a better strategy, think again. When you take a loan, you have to pay it back with interest. By the time you’ve cleared the debt, you will have paid much more than you borrowed. Many people struggle to pay off their student loan debts for several years after graduating.
Saving for college is a much smarter strategy than taking a loan. Even if you don’t manage to save enough to cover the total cost of college, whatever you save will help to lower the amount you borrow by that much. That can make a notable difference in terms of the amount you save in interest.
If you don’t have a strategy for saving for college, the time to start is right now. These tips will help you get started with saving for college in 2022.
#1. Start Saving Early
So how early should you start implementing a savings strategy? Clichéd as it may sound, it’s never too early to start saving for college. Yes, you can start while your child is still in primary school. In fact, that’s the best gift you can give your child – a college education with minimum loans.
When it comes to savings strategies, it’s worth emphasizing that the earlier you get started, the more time you have to build your savings. You’ll find that it’s easier too. Saving a few dollars every month for ten years is so much more doable and less stressful than having to save thousands of dollars a month for a year.
Another advantage of starting early is that you can invest the money for faster growth. With the right investment, those seemingly meagre monthly savings will grow many times over through the years. It’s a win-win college saving strategy.
#2. Save Gift Money for College
Doting grandparents and assorted relatives tend to shower little ones with all types of gifts not just on occasions but any time of the year.
While all those puzzles and blocks and video games are exciting to little kids, that excitement only lasts till the next thing comes along. A far better use of the money would be to put it towards their college fund instead.
One way to approach this is to tell all relatives that you appreciate their generosity but your child has enough toys already. Instead, adding the money to their college fund may be a better idea and will put their money to the best use.
Don’t worry about grandma and grandpa getting angry about this request. They won’t. The high cost of college comes as no surprise to anyone. In fact, they’ll be more than happy to contribute to their beloved grandchild’s education fund.
#3. Choose a Savings Plan
There are several different savings plans to choose from for the purpose of saving for college. Two of the most common options are the 529 Savings Plan and the Roth IRA.
529 accounts are among the most popular of all college savings plans. The biggest benefit of these plans is the tax credit you get for contributions made towards the plan. The exact benefits may vary by state. Some states offer tax deductions on your contributions.
The Roth IRA is a type of investment account that allows you to contribute a maximum of $6,000 annually. The only condition is that the maximum investment cannot exceed certain income limits based on your filing status. The biggest advantage of Roth IRA accounts is the flexibility they offer on withdrawing funds.
Take time to explore both options. Once you’ve decided which one is better suited to you, open your savings account right away. It’s important to review your cash flow to determine how much to contribute to your chosen plan. You want to make sure that you’re being realistic about how much you can afford to contribute every year without compromising on other living expenses or saving for other goals.
#4. Set Up a Dedicated Account
Whether you choose to open a 529 plan or a savings account in the bank, it’s advisable to set up a dedicated account that’s earmarked for college. When you set up a dedicated account for college savings, it acts as a commitment. You’re aware at all times that the money is reserved for a specific purpose and you’ll be less likely to dip into the account and withdraw money to spend on non-college expenses.
#5. Diversify Your College Saving Strategy
It’s tempting to want to put all your free cash into accounts or investments that offer the best returns such as a 529 account. However, this is not a smart financial strategy. If there’s one thing the pandemic has shown us is the importance of having some amount of financial flexibility. This way, if one avenue shuts down or fails for whatever reason, you won’t lose all your money.
Ideally, think of spreading your money across three types of investments. Financial experts always advice putting some in high-risk-high-returns accounts, some in medium-risk-medium-returns-accounts, and some in low-risk-low-returns accounts.
#6. Automate The Process When You Can
During the early years, when college may seem a long way off you’re more likely to have doubts about the need to start saving so early. It would be so much nicer to splurge and use that money for a dinner at an upscale restaurant or a day at a spa.
To avoid the temptation, it’s best to automate the process wherever you can. For example, you can have a part of your paycheck deposited automatically every month into your child’s college fund. Just this small step can boost your savings considerably. After all, if you don’t have it, you can’t spend it. Do yourself a favor, automate the process and curb the temptation.
#7. Put That ‘Found’ Money To Good Use
When we talk about saving, whether it is for college or any other purpose, we tend to focus solely on recurring income such as salaries. However, through the year, money often comes in from other sources too in the form of an inheritance, work bonuses, a tax refund, or some other windfall. Don’t overlook these funds. And don’t spend them unnecessarily either.
The best thing to do with this ‘found’ money is to add it to the college fund. You’ll find that the individual small amounts actually add a significant amount to your savings account at the end of the year.
#8. Cut Back on Unnecessary Expenses
When you want to save money, the single best thing you can do is to cut back on unnecessary expenses. We all have those.
Are there streaming services you hardly ever watch? Music or audio book subscriptions you don’t use? Find or eliminate these hidden expenses. And then increase your auto deposit by the same amount
#9. Refinance Your High-Interest Debts
With interest rates are at all-time lows right now, it’s the perfect time to refinance your high-interest debts. The lower rate will save you thousands of dollars in accrued interest that you can add to your college savings fund. It’s worth refinancing even if the refinancing rate is only a few points lower than the rate you’re currently paying. The smallest rate reduction can save you a substantial sum over the life of the loan.
Are you paying off a mortgage, personal loan, or a vehicle loan? Go through the loan details and see what interest rates you’re paying on those debts. Then go to RaptorFi to check your personalized interest rate if you refinance those loans. If the rate is lower, consider refinancing your debt.
Don’t forget to consider your credit card debt too. Credit cards have the highest interest rate. Refinancing will help lower the rate and free up money that you can add to the savings fund.
#10. Use Those Daycare Savings
You paid for daycare when your child was younger. Now that your child has grown and is attending school, you no longer have to bear that expense. That’s a lot of money freed up right there. You can use that money for anything you want. Instead of putting it towards a monthly cable subscription, redirecting it into college savings would be putting it to better use.
Saving for college doesn’t have to be stressful or overwhelming. Using the saving for college strategies above will help you save the maximum money towards college increasing your stress levels. If you are still looking for additional advice on saving, please visit our financial planner tool.