Let’s face it – college costs are increasing, and so is the financial strain on students and parents. According to a recent report, the average approximate budget for full-time undergraduate students ranges from $18,830 to $55,800, depending on the type of institute, including public colleges and private non-profit ones. The said estimates include boarding fees, tuition costs, and other mandatory expenses.
These figures may seem concerning. But if you strategize around saving for college, you may tackle the costs smartly. There are numerous ways to save for higher education, and this post explores the most effective ones. Read on to find out everything involved!
The Ideal Time to Start Saving for College
The ideal time to start saving for college typically depends on different factors, including your age and socioeconomic condition. However, most financial experts agree you should start as early as possible. The sooner you start saving, the less reliance you will have on borrowing or diverting money from other essential expenditures.
It’s always wise to join a side hustle to set aside some money for your college funds. However, in case you fail to manage one, you can talk to your parents and ask them to allocate a certain portion of their income every month for your higher studies.
If you are already earning, you should develop a consistent saving habit. For example, earning $500 per month from your part-time job can save 20% of the amount ($100) monthly. This will accumulate to $1200 yearly, and if you use the right saving strategies, this amount can turn into a substantial one, which you can later use for your college education.
Remember, this approach will help you reduce your financial burden in the future, and you will probably experience a smooth transition into postsecondary education.
What Amount Should You Set Aside for College
While several factors, like your financial condition and plans, influence your savings requirements, there’s a universal rule. You should dedicate a definite part of your income to your college savings.
Suppose you plan to join an out-of-state college that charges $60,000 for tuition and fees, $54,000 for accommodation, and $6,000 for books over four years. This sums up to $1,20,000.
You have five years in your hand to accumulate the amount. In this scenario, you will have to save $24,000 every year. If you are entitled to any grants, scholarships, or financial aid, you can deduct them from your total projected college expenses and focus on accumulating the remaining amount.
The Best Alternatives to Consider When Paying for College
Now that you know the basics, let’s walk you through the seven best alternatives to accumulate money for college expenses.
Consider Coverdell
If you plan to save for your child’s education, consider opening a Coverdell Education Savings Account (ESA). Instituted by the U.S. government. Its purpose is to assist families in accumulating funds for their children’s education-related expenses. Remember, the beneficiary should be under 18 years old when the account is set up unless they have special needs.
For instance, let’s say you have a 10-year-old child. You could start a Coverdell ESA for them now and contribute up to $2,000 annually, which is the maximum cap for total contributions. Thus, if anyone from the family also wants to contribute, they must ensure the total doesn’t exceed the given limit.
Coverdell ESAs offer a great deal of flexibility as they can be used to cover a broad range of expenses for students enrolled in eligible schools. These funds can be utilized for higher education and primary and secondary schools (grades K–12).
The distributions from Coverdell ESAs are tax-free, provided they don’t exceed your child’s yearly adjusted qualified education expenses. However, if the distributions are more than the expenses, you’ll pay taxes on the gains at your child’s rate, which is typically lower than yours.
For example, if you withdraw $3,000 in one year but only $2,500 is spent on eligible educational expenses, the remaining $500 will be taxed.
However, remember that Coverdell ESAs come with income restrictions. The adjusted gross income (AGI) for single taxpayers should be $95,000 or less; for married individuals, it should be $190,000 or less to make a total $2,000 contribution.
If your AGI exceeds these limits, your contribution limit starts to decrease and gets phased out at $110,000 for single taxpayers and $220,000 for joint filers.
Invest in 529s
If you’re looking to save for future education costs, a 529 plan could be an intelligent choice. These tax-advantaged savings plans, named after Section 529 of the federal tax code, were initially created for postsecondary education expenses. However, recent changes have made them even more versatile.
There are two types of 529 plans – education savings and prepaid tuition.
- With an education savings plan, your investments grow tax-deferred. Besides, withdrawals are tax-free if you use them for qualified education expenses.
- Alternatively, prepaid tuition plans let you pay current tuition rates for future college or university attendance. Think of it as locking in tuition at today’s rates, which could save you money if tuition costs rise.
Remember, 529 plans aren’t just for postsecondary education. You can also use them for K–12 education expenses and apprenticeship programs. However, remember that tax-free withdrawals for K–12 students are capped at $10,000 per year.
Interestingly, after the SECURE 2.0 of 2022, you can even use 529s to pay off student loans or fund a Roth IRA. That’s some serious flexibility.
However, you should exercise a little caution when withdrawing money from a 529 plan. Withdrawals for non-qualified expenses could leave you with taxes and a 10% penalty. Exceptions are there for circumstances like death or disability, but generally, it’s best to use the funds for intended educational purposes.
While contributions to a 529 plan aren’t federally tax-deductible, over 30 states offer tax deductions or credits for 529 plan contributions. You usually need to invest in your home state’s plan to take advantage of these. However, if you’re ready to skip the tax advantage, some states let nonresidents invest in their plans.
PLUS Loans
If you’re a graduate student or a parent of an undergraduate student, you can consider PLUS loans.
To qualify for this loan, your child (if you’re a parent) must be registered as at least a half-time student in a recognized institution. Once the loan is approved, it’s used first to pay for tuition, room, and other institutional fees. You can use any remaining money to cover additional education-related expenses.
PLUS loans offer the stability of a fixed interest rate. For example, if you were to take out a loan between July 1, 2021, and July 1, 2022, you’d have a rate of 6.28% throughout the loan term. To apply for a PLUS loan, you and your child (if it applies) must fill out the Free Application for Federal Student Aid (FAFSA).
You’ll also need to pass a standard credit check. If your credit history is less than stellar, don’t worry, there may be some workarounds. You might still qualify if you can find an endorser for the loan. Alternatively, you can demonstrate specific extenuating circumstances.
However, it’s crucial to know about certain costs associated with PLUS loans. These loans carry a fee, which is deducted from each disbursement. For example, if the loan is taken out between Oct. 1, 2020, and Oct. 1, 2022, the fee is 4.228%. On a $25,000 loan, you’d receive $1,057 less than the total amount you borrowed.
Yet, when it comes time to repay the loan, you’ll have to pay back the full amount you borrowed, including these fees.
Harness Scholarships
Did you know over 1.7 million scholarships are awarded annually to students of all backgrounds? With these awards, you can reduce your college costs significantly.
To find and secure the right scholarships, focus on applying for alternatives that suit you. Don’t be lured by the number; instead, look at the fit. Are you a volunteer? Or perhaps a “Star Trek” fan? There’s a scholarship for almost anything. By targeting scholarships aligned with your interests and experiences, you’re more likely to win.
Don’t overlook your school’s financial aid office, either. Scholarships offered directly by your school might not be widely advertised, but they could be a gold mine.
Also, remember to harness the power of scholarship search engines. These platforms can help you find options that align with your needs and qualifications, saving you time and effort.
Submitting an accurate and complete application is crucial. Be vigilant about deadlines, and read through every detail. Ensure you have all necessary documentation ready before you start the application. Simple mistakes like exceeding word count limits or making grammatical errors can cost you a scholarship, so be attentive!
Furthermore, stay organized. Keep track of your applications, deadlines, award amounts, and essay topics. Set realistic earnings goals and monitor your progress. You can use digital tools like Google Docs or good old-fashioned Post-It Notes, whichever works best for you.
There are many types of scholarships available, including:
- External scholarships from private groups or foundations
- School-sponsored scholarships
- Need-based scholarships
- Merit-based scholarships for those with outstanding talent or who volunteer.
Ideally, you need to aim for renewable scholarships. These scholarships pay a certain amount every year as long as you meet the criteria. Such criteria include maintaining a specific GPA and so on. These scholarships can typically provide a steady stream of funds for your education.
Remember, the more scholarship money you secure for your college fees, the less you’ll have to pay in student loans after graduation. So take your time, do your research, and make the most of these opportunities. After all, every scholarship won is a step towards an affordable education.
Look for No-loan Colleges
No-loan colleges are institutions that completely cover their students’ financial needs without resorting to student loans in their aid packages. This approach eases the financial burden on students and their families when it comes to paying for college tuition.
Presently, there are around 75 schools in the United States that have adopted some form of a no-loan policy. This includes prominent institutions like Harvard, Princeton, and the University of Pennsylvania.
Usually, no-loan colleges leverage scholarships, grants, and work-study programs, operating on a need-based financial aid system. They assess your family’s ability to pay and then craft a financial aid package to cover the rest.
Typically, these generous policies focus on students from lower or moderate-income households. However, the specific income threshold for qualifying for no-loan financial aid varies widely by institution.
For instance, Stanford University has a no-loan policy for families making under $1,50,000 a year. On the other hand, Princeton University’s no-loan policy covered all students with a family income of less than $65000.
Wrapping Up
Attaining a higher education isn’t just about the grades you achieve or the degree you earn. It’s also about learning financial responsibility, understanding the value of money, and making smart, forward-thinking decisions.
With the right financial planning, you can transform the daunting task of paying for college into a manageable part of your educational journey, setting a strong foundation for your financial future. So, don’t let the fear of college costs deter you. Instead, use these strategies as a roadmap to achieving your educational aspirations without the heavy burden of crippling debt.
Your dream college experience is more attainable than you think!
Frequently Asked Questions
What happens if I save too much in a 529 plan and my child doesn’t end up using all of it for education?
If the funds are not used for eligible educational expenses, the earnings portion of the withdrawal will be subject to federal income tax and a 10% penalty. However, you have options such as changing the beneficiary to another eligible family member, saving it for graduate school, or even using it to pay for your own continuing education.
Can I apply for scholarships even if I’m not a top student or a star athlete?
Absolutely. While some scholarships are merit-based, many others are based on factors like community service, leadership, artistic talents, and even specific interests or hobbies. There are also scholarships that focus on financial need, family background, or intended area of study.
Are PLUS loans available to parents of graduate students or only to undergraduate students?
PLUS loans are available to both graduate students and parents of undergraduate students. These loans have a fixed interest rate and can cover the full cost of attendance minus any other financial aid received.
What’s the difference between a Coverdell ESA and a 529 plan?
Both are designed to help save for education expenses but have key differences. For instance, Coverdell ESAs have an annual contribution limit of $2,000, and the funds can be used for both K-12 and higher education expenses. On the other hand, 529 plans have higher contribution limits, offer potential state tax benefits, and were initially created for postsecondary education expenses. However, recent changes have expanded their use.
Do no-loan colleges cover all costs or only tuition?
No-loan colleges aim to cover the full demonstrated financial need of students. They include tuition, books, etc. However, the specifics can vary from one institution to another.
Featured Image Credit: Karolina Garbowska; Pexels: Thank You!
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