Sending a child to college can be one of the largest expenses that parents will spend on their children in their lifetime, so taking proactive steps in saving for your child’s future college plans can help parents’ long-term financial well-being. Because college tuition is such a large expense, several different factors will play a part in creating a successful savings plan.
Remember that each family will have to find what works best for them and their specific situation to determine how you can most efficiently plan ahead. Considerations such as whether or not parents are going to pay fully for their children’s education if they attend a public, private, or community college, or the types of scholarships they might acquire will influence how parents navigate this process.
While some of these decisions certainly won’t be decided until the later years of the child’s life, it is still best practice for parents to begin saving early on. Read below for some information on how parents can ensure they stay on the right track in funding their child’s higher education.
A 529 plan
With the cost of college rising each year, opening a savings plan as early as possible can be an excellent option for parents to accumulate funds slowly. Almost all states have a 529 savings plan for parents looking to put money away for their children’s future education.
This tax-advantaged plan allows parents to put money away and build funds without being taxed as it grows. It is also not restricted to the state you reside in or the state the college you plan on sending your child to college in. Therefore you can open a 529 college savings plan in a different state. This plan is not income-restricted, and it is possible to list yourself as the beneficiary if you wish to start this type of saving before your child is born.
To get an estimate on what this cost might look like for a specific situation, use this calculator to get an estimate on how much to save for college with the 529 plan broken down by monthly contributions. This tool can help determine a price range, including factors such as outside funding or if the child will be paying for part of their education.
Another important piece of a college savings plan is locking down a reliable life insurance policy or reevaluating whether or not a current life insurance policy has enough coverage. Often, this is something that parents will want to consider even before children are born. Life insurance acts as an income replacement in the unexpected passing of a parent, so having this death benefit payout set in stone is crucial if higher education will be part of a child’s future.
Depending on the parents’ financial situation, they will want to look into different life insurance policy options. Term life insurance is a less expensive type of coverage, as it provides insurance during a set number of years that it is active. Whole life insurance, on the other hand, is a type of permanent life insurance. The main difference is that whole life insurance can build cash value over time and can be seen as an investment—although this makes it a more costly option. Both options can sufficiently cover an unexpected loss, so deciding which policy’s function suits the family’s needs best must be considered.
Although it is harder to think about this situation, having adequate coverage so that children can have access to funds for their education is a key component in financial planning.
As parents begin their planning process, they should consider how a savings bond can benefit children throughout the years, and become a growing investment in saving for their college education. There are two types of savings bonds available in the US today—Series EE US Savings Bond and the Series I US Savings Bond, with their key differences explained here.
The interest that grows with savings bonds is at a fixed-rate, and unlike other types of investments, minors can own the bonds. This makes savings bonds a great financial gift from grandparents or other relatives. So as parents consider their family’s future college costs, asking relatives to gift bonds can be a great and growing asset in helping towards those education expenses. Remember that in order to get a savings bond or have one gifted, parents will need their child’s Social Security number and TreasuryDirect account number.
Depending on the child’s age, if they are starting to apply to colleges, seeking out financial aid options also can factor into a college savings plan. Looking into FAFSA, or Free Application for Federal Student Aid, is how colleges and universities determine which students are eligible to receive financial aid—state, federal, or university-sponsored. FAFSA takes into consideration a student’s family income and other assets, and applying is free, so it is recommended that students fill out this application to see if they qualify for this aid even if they are unsure if they will qualify.
FAFSA is not the only resource available to students, and parents can help their children search for scholarships they might qualify for. From athletic, academic, state-wide, minority, and more, there are many different scholarships available for students. During high school is a good time for parents to start talking with their children about the potential opportunities available to them and how they can best prepare for their education costs.
AP classes, or Advanced Placement classes, are designed to offer high school students the opportunity to receive college credit on intro-level college courses. Although they are not offered at every high school, these classes can be a great option to save money on a few credits before entering college as a freshman. Not only does this give your child a glimpse into the workload expected from a college student, but the cost of an AP exam is much lower than the price it would take to cover the cost of the course for a whole college semester.
Because AP classes require an exam and a certain score to pass to receive college credit, it is important to discuss with your child’s school and counselor if this educational path is right for your child. Similarly, not every college will accept this type of credit to count towards graduation, therefore looking ahead to see which school will count these classes is also beneficial if you plan on factoring this into your financial plan.
Although this information can seem overwhelming, parents can also utilize financial planners who can help discuss the best options available for their own situation and increase their financial knowledge. Along with bills, debts, or other retirement savings, financially preparing for college is just a piece of the puzzle, and doing your research in advance can help navigate parents’ financial journey.
On top of planning for the future, consider how to cut back on expenses to save money now, and practice sound spending habits. Staying financially responsible in the present and having open conversations can help guarantee that children will have the opportunity to earn that diploma in the future.