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saving for college
22 Nov 2020

Saving for College: 7 Essential Facts All Parents Should Know

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When it comes to building up a college savings for your child, there’s no such thing as starting ”too soon”. It’s no secret that college tuition is a huge financial commitment, so beginning a college fund sooner, rather than later, is always recommended.

As a parent who cares about your child’s future, you don’t want to send them off into the working world, weighed down by student loans. If anything, you want to offer some form of financial aid or jumping board to start them off on the right track.

Learn more about saving for college in this blog and a few recommended practices for parents.

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What Is the Average Cost of College?

When you look at the whole figure of what it costs to pay for a standard 4-year stint in college, it may seem shocking. To add to this, this figure is most likely to change by the time your child is actually old enough for college.

According to research by Wealthfront, it costs over $300,000 to put a child through 4-years of tuition in a private college, and more than $100,000 in a state or public college. This amount may seem staggering, but financially, it can be done. The trick is to break this number down into achievable savings goals from one year to the next.

Also, there are other options to consider when funding your child’s tertiary education. You don’t have to cover all the costs of their tuition, perhaps a portion of it, with the rest supplemented by a student loan.

However, this is something to carefully consider as the last thing you want is for your child to be drowning in debt before they’ve even had a start at life in the working world.

Saving For College: 7 Realistic Strategies

Here’s how to get a head start on your college savings fund:

1. Begin a 529 Savings Plan

If you haven’t already heard about a 529 savings plan, they are usually sponsored by the state, aimed at encouraging parents to save towards their child’s future education.

The great thing about a 529 savings is that it’s tax-friendly. This means that most states allow you to deduct these contributions from your income tax, and withdraw the funds without being taxed, too.

The plan is also flexible, allowing you to put money into any state’s 529 plan if you prefer theirs over the state you live in. It’s best to open up a 529 plan as soon as possible — there’s no such as thing as your child being too young. Other family members can also contribute to a 529 savings, no matter where they are based.

2. Invest in a Roth IRA

Sure, this is usually a savings plan used for retirement. But investing in a Roth IRA for your child’s college fund is a smart idea for a number of reasons. It’s a brilliant way to stash away after-tax dollars, while protecting your earnings and growth from being taxed. So long as you are making the appropriate distributions.

Carefully consider all the pros and cons of a Roth IRA before you start investing, though. Remember that other family members cannot contribute towards it like a 529 savings fund. This being said, a Roth IRA is never a wasted investment. If your child decides to not go to college, at least you have these funds to contribute towards your retirement.

3. Carefully Consider What You Do With Pretax Earnings

If you work for a company that allows you to deduct pretax earnings from your paycheck, then stash away what you can through a Dependent Care Account. Most companies allow their employees to deduct up to $5,000 in pretax earnings, which is usually allocated to childcare.

This money is a great way to save on your taxes while building up a decent college fund. Once you are reimbursed for your expenses, simply deposit this amount into a 529 college plan or any other savings account.

4. Make the Most of Rewards Credit Cards

If you’re going to have a credit card or multiple credit cards for that matter, make sure they offer a rewards scheme for your purchases. One example of this is gaining a ”point” every time you spend a dollar. When you pay for household items and other big expenses, use your credit card so that your points rack up quickly.

Instead of redeeming your points for prizes, use the cash-back option, and deposit this money into your child’s college fund. Also, look out for affiliated programs that contribute money towards your college fund when you purchase qualifying products.

5. Consider a Home Equity Loan

A home equity loan is not a traditional means of funding college tuition, but it can work. The equity of your family home is undoubtedly your largest asset — and this equity can be used to cover college costs. Instead of opening up a college fund, you can tap into the financial aid in order to finance college costs.

As with any loan, you will have to pay this equity back. But this a good option if the time comes and you find that you just haven’t saved enough. You can use a portion of this equity to supplement costs such as tuition, room, and board, etc.

6. Don’t Shy Away From Asking For Help

Remember that there are generally people who are willing to help when it comes to college funding. Most of the time this could be grandparents and in-laws. So don’t shy away from having an open and honest talk about college costs.

They may be more willing to help than you realize. Discuss options about how they can contribute. Instead of giving your child multiple gifts, ask them to scale down on the gifts and deposit money into their college fund. Cash contributions over an extended period of time can add up and make a big difference.

7. Use Tax Breaks To Your Advantage 

By putting money into a 529 savings, you can save by means of a tax credit. This tax break can be used to pay for some of the upfront college costs. Essentially, if you pay less in tax, this means you have more money at your disposal.

There’s also the American Opportunity Tax credit and Lifetime Learning Credit to take advantage of. Both of these tax breaks offer a certain amount of credit to cover education costs, whatever they may be.

Boost Your Financial Knowledge With Bonsai Finance

Saving for college does not have to completely bankrupt you. If you’re smart about how you save and set yourself achievable goals, a college education could become a reality for your child.

If you’re looking to learn more about managing your finances like a complete expert, Bonsai Finance is your go-to. We offer a plethora of informative articles on personal finances, loans, credit cards, and so much more…