Calculating how to pay for college is stressful. It can lead to many emotional conversations and decisions between parents and students. Knowing you can’t go to your dream school because you can’t afford it can be heartbreaking, but if you set up a savings plan early enough, you can save yourself from this situation.
If you are fortunate enough to choose any college and pay the bill out of pocket, great! However most parents and students are not in this situation. You will need to have a serious savings plan to save yourself from mounds of debt. A 529 College Savings Plan can put you in an excellent position for helping your child cover their college expenses.
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How America Pays for College
Sallie Mae estimates that 34% of college is paid for by scholarships and grants and 29% from parent income and savings. The rest comes mostly from borrowing. While this is a positive that the most coverage comes from “free” money, there is still usually a hefty bill leftover to pay. They also asked families if they had a plan of how they would pay for college, only 2 out of 5 families said yes. From the families who do, they borrow ⅓ less than families who do not. The lacking of planning can be costly, too. The average graduate last year graduated with $35,000 in debt. I’m sure that’s a number no one wants to hear.
While many families use a traditional savings account, 48%, only 27% are using a 529 college savings plan. We will look into some benefits to these accounts and also cons to explain why this number is so low. If you haven’t thought about saving for your child’s college, now is the time. Planning is referred to as searching for colleges, looking at costs, understanding saving will be needed to cover the expenses. Many financial experts have differing opinions on how to save and what saving vehicle to use, but something they all agree on: start now. Many suggest as soon as your child is born because investing in the first few years allows for your money to gain interest and increase your amount.
Saving doesn’t have to be placed solely on the parent’s shoulders. When you believe the student is old enough, start talking to them about the cost of college. Helping them understand the serious financial investment higher education takes will benefit them. If they know the kind of hard work it took to afford college, they will likely be more successful. This also gives them an opportunity to start understanding the importance of financial literacy and saving for college. Have them get a part-time job or use their skills to create an entrepreneurial venture to put money into their college savings account. This will teach them accountability and to appreciate the hard work it takes to go to college.
If you don’t feel responsible to pay for your child’s college, there is still an option that validates saving. Saving your money to pay for your student’s college and having them repay you eliminates the interest banks will charge- which adds up fast. This situation can be tricky, but if you are upfront and honest with your child about the situation from the beginning, it can work out.
529 College Savings Plan
The 529 college savings plan can be an excellent vehicle for driving your money to great returns. An example Forbes uses, if you save $50,000 over 15 years you could end up with $75,000. If you borrow 75,000 you could end up paying between $100,000 and $150,000 (6 % interest) depending on the length of the loan. So, you can pay yourself interest or the bank.
The beauty of the 529 is that the account holder is the driver, with the ability to name and change the beneficiary virtually whenever. It doesn’t have to be used for college (although there are penalties), but say your child doesn’t need the money for college (i.e. didn’t go or got a full ride all expense paid) you can change the beneficiary to a different child, your future grandchild, or even your neighbor. It has great flexibility and that’s why many people like it. Also, the growth you accrue cannot be federally taxed if it is used for college. If you want to read more about opening a 529 in your state, read here.
Now that you understand the importance of saving for your child’s college, it’s time to get started. If you are ready to start planning for your child’s college, use our college match finder today!