Saving For Your Child To Go To College
Every parent wants to see their child go to college, but it can be a real financial burden. For example, in 2010 it cost nearly $16,000 a year to send a child to a state university, and that went up to more than $32,000 for a private college. If you look back over the decade before that, the cost of going to university rose over 60% – so if your little one is eight years old now, the chances are that you will be paying out at least $120,000 for a four-year degree. It’s definitely time to get saving.
However, the problem is that your savings aren’t going to earn very much interest today. For example, 1% is average interest rate on a CD, and if you put your money into a savings account you’ll probably end up with even less. You can get better returns by investing in treasury bonds – for example, a 10-year treasury bond pays about 2.75% at the moment – but your money is locked up for that period of time. What other options are there?
One of the most popular ways of saving is a 529 savings plan. This is very similar to the 401(k) that you have for retirement – you don’t pay any tax on interest and other gains until you use the money to pay your child’s tuition fees. This means that your savings will grow more quickly thanks to the power of compounding – and in any case you won’t end up paying the tax at the end if the money is used to pay qualified tuition expenses.
Another thing to note about a 529 plan is that it belongs to you, not to your child. This is very important – setting up investments that your children own to pay for college is generally a bad idea. This is because of financial assistance implications. For instance, if you have $100,000 in savings when your child goes to college, the available financial aid will only be reduced by 5.6% of this amount – $5600. On the other hand, if your child has $100,000 in savings, the amount deducted from financial aid allowances can be as high as 35% of this – $35,000. That’s 20% to 25% of the total cost of college that you’re giving away when you don’t have to.
Many parents also find that prepaid tuition plans are a good idea. This is when you pay for tuition in advance, rather than paying for it when your child goes to college. The advantage is that you pay for future tuition at today’s prices – which can be a good deal if tuition fees rise more quickly than inflation. However, there are a couple of catches. First, you can save for prepaid tuition using a prepaid 529 plan, but this can only be used to pay for tuition in the state where you live. Second, the full value of the amount in the plan will be deducted from available financial aid – unlike the 5.6% that is deducted for a 529 savings plan.