College is a great opportunity. Students are able to experience more individual freedom. They can explore different areas of themselves and the world. But it’s not all that easy.
Before classes even start parents and prospective students focus on the cost of tuition, room and board, books, and meal plans. All of that can and does add up quickly. And the worst part, the cost of attending a four-year college keeps going up.
The climbing costs of college can paralyze parents with worry. Parents don’t want their children to bear the financial strain of paying for college all by themselves; but how can parents make college more cost effective? While there may be numerous resources for making education more cost efficient available online and elsewhere, sorting through all this information may prove challenging and may become increasingly daunting as time progresses.
One of the best ways to eat into the rising cost of a college education is to save. There are dozens of manageable ways to start a savings plan for your child’s college education. And you don’t have to do it all on your own or wonder what’s next. It can be as easy as starting a Gerber life college plan.
Average Cost of College
So how expensive is it really? There are plenty of college graduates, parents, and even news outlets talking about the cost of a college education. But sometimes that price tag is hard to visualize without real numbers.
According to the Education Data Initiative, the average cost of a four-year degree at a public university is $104,108. That’s just over $26,000 a year. And the cost gets even higher if the school is out-of-state or a private university.
Those numbers include everything from tuition and school fees to books, supplies, and even room and board. That doesn’t include, however, any transportation costs, insurance costs, everyday living expenses, or student loan interest. That means the true cost is even higher than those reported numbers.
That staggering cost can force parents and students to get a little creative when looking for money for tuition. But outside some of those more creative avenues, there are savings options ready and available. The best news? It’s never too late to start putting a little money away to offset or cover those costs.
When do I start a college fund?
So when do you start? Of course, the best option is to start saving immediately. Start the day your child is born. With compound interest and regular investments into the savings plan, the balance can really add up.
The exact specifics for how or when a savings fund can be established will differ depending on the type of savings plan and the state it’s opened in. But most options can be opened as early as the day your child is born.
If you didn’t start that early or circumstances won’t allow that, it’s okay. Starting a college fund at any time can help defer some of that collegiate cost even until law school.
What are some savings options?
Saving for college isn’t always just setting aside a percentage of your monthly income. Of course, even putting this small amount away in a standard savings account is worthwhile. After all, it is saved money, and that always helps.
There are other ways to save though. Each option has differences – how much can be added, who can set it up and have access, how much it compounds – and each one can help you reach the goal of that college degree.
More traditional savings accounts can be used to start a college fund for your child, and they are often easiest to set up. But these types of accounts have very small returns. This means the money you put in is the money you’ll pull out, there won’t be a lot of growth over the life of the savings account.
On the other hand, there are few limitations to what can and cannot be added to these accounts. There are rarely yearly investment limits or caps, so you can freely put money into the account. Plus, savings accounts allow your child to be directly involved in the savings account, and they can begin to learn the value of money.
A 529 plan is a very common type of account specifically designed to save for a child’s college education. There are some major benefits to the 529 plan:
- Earnings and withdrawals are tax-free
- Funds are not reported to FAFSA
There are different plan types within a 529 plan. Each of these plans allows you to invest different amounts of money each year and over the life of the plan. But the investment strategies can be limited. Each plan offers a pre-determined menu of investments, so you’ll need to understand the ins and outs of your selected plan.
These plans are considered parental assets, but they are set up under the name of the child they are set up for.
This type of savings account, unlike a 529 plan, is set up by an adult for a child – it’s not directly under the name of the child. Once the child reaches a predetermined age – often 18, 21, or 25 – the accounts transfer to that child.
Custodial accounts are brokerage accounts which invest in diverse investments like stocks, bonds and mutual funds. One key advantage is their virtually limitless investment potential: no restrictions exist for what can be put in these accounts which means there’s potential growth potential galore!
There are some things to consider, however. There are taxes associated with custodial accounts and that will need to be accounted for before selecting this investment strategy. Also, custodial accounts are not specific to education needs. Once a child receives access to their funds, they can use it as they see fit.
If the funds are used for educational purposes, it’s important to know that those custodial account funds are reported to FAFSA when applying to college. That means any student aid options will see a 20% decrease.
Roth IRAs are retirement accounts designed specifically to fund educational expenses. When owned by parents aged 59 years or above, funds in such accounts can be withdrawn when withdrawing on reaching that milestone age. At that time there are also taxes or penalties.
Once the funds are withdrawn, they can be given to the child to use for college. Once again, these funds do not need to be reported to FAFSA, so there isn’t a deduction to potential financial aid packages.
There are investment caps for each year, and those caps change depending on the owner’s tax filing status. The growth potential is high for Roth IRAs, but not as high as other options.
Finally, there is always life insurance. This may seem a little less conventional, but the Gerber Life College Plan is a great savings option for your child’s education. The Gerber Life College Plan is a life insurance policy that is also used as a college savings plan.
Parents can set up the policy for their child and determine when the policy matures – or pays out. The total payout amount is anywhere between $10,000 and $150,000 guaranteed by Gerber, but the payout amount will be taxed.
As a life insurance policy, the Gerber Life College Plan gives that extra sense of security in case the policyholder passes away. Overall, it’s a simple plan with minimal risks and costs. Who would have thought life insurance would mean big college savings?
Laura Gunn writes and researches for the car insurance comparison site, ExpertInsuranceReviews.com. A mother of two young boys, she is passionate about all parents understanding their savings options and setting their children up for both educational and financial success.