College has never been more expensive, and never felt so financially unattainable. As of early 2022, the average college graduate had $39,351 in student loan debt, growing by over $5,000 in just two years. In the United States, the total student loan debt is about $1.75 trillion. It’s overwhelming to think about how these costs may continue to climb in the future.
If you are a parent, it can be scary to think about how you will help your child afford it. But preparing early and doing your research can pay off tremendously when it comes to creating a college fund. So today we are talking about what you can do to start saving money for your kids’ education.
Here are our top five tips to start saving for college.
Start as early as possible.
It is incredibly important to start saving early. The earlier you start, the more time your money will have to work for you, allowing you to grow your college fund as much as possible. Plus, if any of the college funds you select have a yearly maximum contribution, it will give you more time to add to the fund.
Determine how much you should save.
When you create a budget, it’s always a good idea to have a solid number goal in mind. But how can you even begin to estimate how much money you will need to save?
You must take into account what state you live in, what college your child is thinking of attending, and what the living expenses might be. This helpful online calculator can help give you an idea of how much money you should plan on saving.
Choose a college savings plan.
There are a lot of options out there for college savings plans. Look around at all the pros and cons to determine what will work best for you.
Education Savings Account (ESA) or Education IRA
These accounts are very similar to a Roth IRA, but they are intended for education. With these accounts, you can invest up to $2000 per year, tax free. They have a much higher rate of return than a regular savings account, and although the amount you can contribute is capped, it can still add up to a sizable college fund. At a rate of return of 12%, if you started investing when your child was born you could save over $125,000 by the time they go off to college. Note that there are income limits for these types of accounts.
These accounts can be used to pay for any education-related expenses, including tuition, vocational schools, and textbooks. The money must be used by the time the beneficiary turns 30.
529 plans are often state sponsored, and can be used for future education. These plans vary greatly from state to state, but generally there aren’t any income restrictions and you can invest up to $300,000 per year. You want to make sure that you have a flexible plan that will allow you to stay in control of how the money is invested. Some of the 529 programs will freeze or automatically adjust your investments, which is not ideal, so be sure you understand what type of 529 you are opening.
These accounts can also be used to pay for any education-related expenses, including tuition, vocational schools, and textbooks.
UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
This type of account is not education specific. Insead, you are essentially opening a mutual fund that will transfer to your child when they turn either 18 or 21. It’s a great option to save, but the money can be used for anything when your child receives it, whether it’s for tuition or that shiny sports car they’ve always wanted.
Investing in savings bonds is a very low risk option for college savings. But with such low risk, there is also low reward. You will earn more than in a traditional savings account, but not that much more. Right now fixed rate bonds earn about .1% annually.
Plan your budget and look for ways you can contribute more.
Once you’ve figured out how much you want to save and what type of fund (or funds) you will start, now it’s time to make it a reality. For an in-depth look at creating and maintaining a budget, check out our post here.
Creating a budget doesn’t have to be super complicated. Just follow our simple steps below to get started:
- Determine your income. Calculate your take home pay (your pay minus any taxes and deductions). Add in any additional income you may have (property rentals, dividends, tips, etc.) This is your total income.
- Determine your expenses. Add up your fixed expenses, which are the expenses you have that do not change from month to month (rent, mortgage, cable bill, internet, subscription services, etc.) Then add up and average out your variable costs, which are expenses that do change from month to month (groceries, electricity, entertainment, etc.) These are your total expenses.
- Compare. Look at the differences between your income and your expenses. How much of a gap is there? Are you saving every month or are you losing money every month?
- Look for more ways to save. Looking at your budget can help you see where you have wiggle room to trim some fat. Some common ways to free up some money every month include:
- Canceling unused subscriptions.
- Cutting back on dining out and entertainment.
- Buying generic brands at the grocery store.
- Refinancing your car loan (refinancing your car loan to a lower rate can loosen a lot of money every month and make a big difference in your budget).
Extra money that you save every month can be allocated to your college fund. You know how much money you want to save, so use that number to determine how much you should be saving every month or every paycheck.
Note: Saving for college is important, but don’t neglect your other responsibilities. Don’t shirk paying off your debts or building an emergency fund: instead try to divide up your extra money every month and do what makes sense for your situation. A healthy budget is about balance.
Encourage your kids to be proactive
Of course we want to help our kids as much as possible to get a good head start for the future. But it is their future and their education, so it’s important to encourage them to take an active role in saving for college and investing. Here are some things that your kids can do to help fund their education.
Open a Savings Account
Teaching kids early about saving is tremendously beneficial. Help them open a savings account so they can start saving at a young age.
Get a Job
Whether it's a part time job at night or on weekends, or a summer job, encourage them to start working as soon as they are able. Not only will it help them save some money and get some real world experience, it will also be a nice addition to their resume.
Apply for Scholarships
There’s money out there for students, you just have to look for it. There are a ton of resources online and through your child’s school that will help them find scholarships for which they may be eligible. Even small scholarships can add up quickly.
Apply for Aid
Your child should apply for federal aid when they are applying to college. Filling out the Free Application for Federal Student Aid, or FAFSA, helps colleges determine how much money they can offer your child. This may be in the form of scholarships, state aid, school aid, student loans, or work study. Read carefully to make sure they are not just student loans, which may or may not be beneficial for your child.
Take AP classes
If your child scores high on your AP classes, they can get college credit. And those are credits that they would normally be required to take (and pay for) at college. Take advantage of these classes in high school and make sure the colleges they are applying to take AP credits. They can easily save thousands of dollars (and possibly skip a semester) if they are proactive with their AP courses.
Those are our top tips to start saving for college.
Being proactive and starting to save for college can be very overwhelming, but we hope this helps you get started. A little investment early on can go a long way and pay off tremendously.
If you are looking for more ways to save, consider refinancing your car loan with Auto Approve. Market rates are still low and you may qualify for a lower car loan APR, which can save you lots of money every month (money that could go straight into that college fund!) If you are thinking about refinancing your car loan, don’t wait!