It is tax season and as you are going over your family’s finances, you are probably discussing your budget for the upcoming year. How can you save money? Where can you save money? Is there any way you can cut spending? These are questions all families ask, especially if you have children.
Here is one thing I have learned as a mom. Kids are expensive. I thought that babies were expensive, but these tiny humans seem to require even more money as they grow older! I have to say, though, I think they are worth every penny. We just want our kids to have the best of everything…or at least have it better or easier than we did.
Having the best does not mean the latest toy or the cutest onesie. It means providing a safe and healthy life. One key component to your child’s life and future is their education. I am agonizing over preschool and kindergarten already, but there in the back of my mind is college.
David Chen. Founder of Millenial Personal Finance is here today to offer his tips on how to start preparing for your child’s higher education today. It is never too early to start thinking about and planning for your child’s education.
How to Budget for Your Child’s College Education
Guest Post By David Chen
Higher education is expensive. While it can be easy to say, “student loans will take care of it,” the cold hard truth is that student loans are plaguing many of today’s college graduates. They graduate and land a job in their chosen field, but the loans follow them for a decade or more. With a significant amount of debt on their shoulders, doing things like buying a car or home can be difficult. As parents, we don’t want our children to have to deal with these hardships.
Moreover, we don’t want to put our retirement or financial health in jeopardy as a result of cosigning. That is why it is a reasonable goal to budget for the college educations of our children. By including the future in our budgets, we can offset as much of their college debt as possible. In some cases, parents have managed to eliminate college debt completely through strategic planning.
Start Budgeting Today
The moment our children are born, we want the best for them. That is why the budgeting needs to start now. The sooner you start, the more money you will save. Eighteen years may seem like a long time, but children grow too fast. Before we know it, they are ready to start their own lives. College is the stepping-stone. There are several college savings options:
College Savings Account
This savings account is limited to funds you are putting back for your child’s education.
College 529 Plan
This plan allows the money to grow without any tax penalties. This is a state-based plan, but you can put your money into a 529 in any state. There are operating costs and fees associated with 529 plans. However, you can contribute between $200,000 and $400,000, depending on your state.
Prepaid College 529 Plan
This plan allows you to buy tuition credits at a college in your home state at the current rate of tuition instead of the tuition rate that will be in place when your child enrolls. The disadvantage of the prepaid plan is that you have to choose the college your child will go to. When your child is ready to start thinking about college, he or she may not want to go to that school. The good news is that you can get the money back, but the money doesn’t see much growth with this type of strategy.
When savings bonds are cashed out to pay for college tuition, no tax has to be paid on the money.
UGMA and UTMA accounts
These are custodial accounts that behave like trusts. You can put annuities, stocks, bonds, or cash into one of these accounts, and then the worth of the account is used toward your child’s college education when it’s time. The downside is that if your child applies for financial aid, UGMA and UTMA accounts are taken into consideration when determining an aid amount. If there is a lot of money in one of these accounts, you most likely won’t have to worry about financial aid anyway.
Coverdell Education Savings Account
Just like UGMA and UTMA accounts, the Coverdell Education Savings Account is a custodial account that is like a trust. You can’t deposit more than $2,000 per year into one or more of these accounts. If you have two accounts, you can only deposit $1,000 per account per year.
Once you decide which savings route you want to take, you need to start feeding money into the account on a regular basis. You need to contribute at least monthly, which will form a great savings habit that will allow the account to grow.
How to Budget
It can be easy to decide what type of account to contribute money to, but we are parents and we have many financial obligations. Every time we turn around, our children need money for field trips, school pictures, popcorn sales, Scholastic book orders, book fairs, lunch, and school supplies. Factor in the clothes they outgrow just a few months into the school year, and it seems almost impossible to put money in a rainy-day fund, let alone a college fund.
How you save depends on the age of your child. If you are down to the wire, doing something like tapping into home equity may be an option. You can also check with the financial aid office of the chosen college to see what type of financial aid award can be offered without your child going into extensive debt. You may even want to check into scholarships since that can reduce the amount of money you need to produce.
If your child is young, cut back on indulgences. Instead of eating at a restaurant every weekend, go every other week and put the extra money in your child’s college fund. Determine where you can cut corners and divide extra cash between a rainy-day savings account and your child’s college fund. Make it a habit, and it will become easier over time. Once the day comes that the college bill is due, you’ll be very glad that you made those sacrifices for your child.