When it comes to saving for college, thinking about the future cost can be scary. If you need to save for your children's college as well as your own retirement, you've got a daunting challenge ahead.
The most important thing you can do is start early. You should plan on saving at least one-third the cost of your child’s future college tuition. In the end, most families end up paying one-third out of their current income, another third in financial aid when their child enrolls and the other third through loans and grants.
The cost of a college education continues to rise faster than inflation, at roughly five percent per year. According to the Institute of Education Services, the average sticker price for four years is $32,790 and at a private college expect more than $150,000.
For starters, financial planning studies estimate that parents saving for college should save about 6% of their income annually to have a decent amount accumulated by the time their child is ready for school.
Set up a 529 college savings plan to take advantage of the tax-free withdrawals for education costs. There are many benefits to this plan – talk to your local bank to set one up!
“I put back $30 a month into a ‘529 College Choice’ plan and the amount can be changed at any time with a minimum of $25 a month,” local Indy mom Jennifer Lee says. “It’s offered through the state of Indiana and is put into a mutual fund. It relies on the stock exchange to earn money. Every year at tax time you get a 20 percent tax credit for how much you put in annually.”
Convey the importance of college to your child early even if you don't tell them about the financial aspects until later. Lay out the parameters for a decision, such as telling your child that you'll pay for the equivalent of four years at a state school but can afford no more.
These strategies can help you to avoid paying full price:
• Encourage your child to graduate a semester or two early. Taking as many advanced placement courses as possible in high school or perhaps a community college class in the summer could give a student a full year's worth of college credit.
• Spend the first year or two at a local community college, an increasingly popular option, before transferring to a four-year college. The average two-year program costs just $2,713 a year.
It’s important to realize that every families’ financial situation is different. Saving for your child’s education is not an exact science – talk to your local bank, financial advisor, or college financial aid office to figure out a plan that is right for your family. Don’t wait until the last minute though! Planning ahead is key.