If you are raising children, you likely have one wish in common with many other families: for your kids to have the same opportunities you have had, if not better. You also understand that education is a primary key to opportunity.
Here are five important questions you may have about funding your child’s education.
Is college really that much more expensive than it used to be?
Yes, and you probably already knew this.
For those whose all-night cram sessions are a fuzzy memory, it can be difficult to understand what’s happening in the lives of college students and parents today. Not all that long ago, a student could work a part-time job in college or multiple part-time and summer jobs to amass enough money for tuition, books and Ramen noodles.
Today, that way of paying for college is nearly unheard of. Education costs have outpaced virtually every other consumer good for the last decade. Average university tuition now hovers right around a full-time, minimum wage worker’s annual salary.
What are the chances Congress will fix this by the time my children are ready for college?
We’re not odds makers, but we suggest you don’t hold your breath waiting for this to happen.
Lawmakers have talked a lot about the cost of higher education, but legislation has gained little traction. Bear in mind that Washington has been part of the problem: In the wake of the financial crisis, the federal government shifted costs to the states, which then shifted support away from universities.
Students pay a much larger share of their college costs than they did even a few years ago.
Bottom-line it for me. How much do I need to have saved to send my kids to college?
The best estimates have the typical public university charging around $250,000 for four years of tuition in the year 2030.
How much you contribute depends on your strategy and assistance from other sources.
A traditional strategy is to save one-third of tuition, pay for one-third of it with your salary at the time, and trust your child to come up with the rest. That means you should aim for around $85,000 or more.
Um, (gulp) $85,000 or more? Can I save that much?
A variety of programs may help.
The most popular savings plan for college is the 529 plan. Contributions to a 529 account offer tax benefits, although its plan comes with an annual contribution limit. Talk to a professional about your particular situation, because it varies from person to person and because the rules change so often it sometimes takes a professional to understand them.
The next most popular option is the Coverdell Education Savings Account, otherwise known as an Education IRA. Coverdell accounts are designed to use for your child’s education and offer tax benefits that are similar to 529 plans, with a few differences. A Coverdell can be tax-free when you put money in and when your child takes money out with any excess ESA funds distributed to the student.
What if I’m not making enough to save a lot or lock up my funds now?
Credit union savings and money market accounts don’t offer the same tax benefits as a 529 Plan or an ESA, but you can easily access your money if a crisis comes up. Consider setting up a separate account for college savings so you always know where you stand.
Money market accounts offer a great supplement to other programs as well, because there’s no contribution limit. You could max out your 529 and Coverdell accounts and still put money into a money market account. You will be accumulating education savings while still keeping it available for other unforeseen circumstances. You will also be preparing for a year in which you aren’t able to contribute $16,000 into a tax-protected account. In that case, just withdraw from your money market and put it into one of the other accounts to receive the tax benefits.
Bonus question: What should I do right now?
Just get started, even if all you can set aside now is a small amount. The earlier you begin, the more you can benefit from the growth that comes from the compounding of interest. For additional assistance, talk to a Genisys Credit Union financial services representative today.
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