It’s the Summer Kid’s Bash All Through July:
What to Expect When Paying For Your Child’s College Education!

There’s one key chapter missing from “What to Expect When You’re Expecting”, and it plays to the tune of over $100,000: the cost of your child’s college tuition. Regardless of whether your child is two or twelve, it can be all too easy to put saving for college on the back burner. But one thing in life is certain; it moves quickly. Don’t get caught unaware and unprepared for college. Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead.

Have you started saving for your child’s future education costs? If you haven’t, it’s time to consider these five steps.

Step 1: Know What To Expect
College tuition gets more expensive every year. From 1989-90 to 2019-20, average tuition and fees tripled at public four-year and more than doubled at public two-year and private nonprofit four-year institutions, after adjusting for inflation. If this upward trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. For a 2018 graduate, the average student loan balance was over $29,800 and the average monthly student loan payment is $393. That is a large burden for someone just beginning their career, but it can be prevented with good planning.

Step 2: Start Saving
It’s never too late or too early to start saving for your child’s college fund. By starting early, you can reap the rewards of compound interest. Even if you don’t think you have enough room in your budget for anything else, $50 a month is still $50 more than $0. Setting up automatic contributions is a good way to remind yourself that college is getting closer and will keep this goal on your mind.

Step 3: Decide How You’ll Save For College
The most common method people use to save for college is through a 529 plan. A 529 plan is a state-sponsored education savings account that allows earnings to grow tax-free. This means that 100% of your growth can be used toward the tuition and is not whittled away paying annual taxes.

There are two categories of 529 plans: prepaid tuition plans and college savings plans.

Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. However, prepaid plans can only be used for in-state schools.

College Savings 529 plans, on the other hand, can be used to pay for college in any state. As an added benefit, some states give you a state tax credit for using their plan. Section 529 Plans are sponsored and administered by states, meaning that you may have less flexibility and choice regarding investment options. However, you are not required to use the plan offered by the state that you live in, you are free to shop around. Visit www.collegesavings.org to understand your state’s policies.

Beyond 529 plans, some families use Roth IRAs to save for college. Your Roth contributions can be withdrawn at any time and can be used for any purpose. In addition, Roth IRAs can help you avoid the high fees that some 529 plans charge and they also offer virtually unlimited investment options. IRAs will also not have any impact on your financial aid eligibility.

For college savings, Roth IRAs aren’t the perfect option, as their primary goal is to fund your retirement (consider that while student loans are always a possibility, there is no such thing as a retirement loan). But Roth IRAs do offer an alternative (or supplement) to the traditional 529 plans. Think about opening a 529 plan for college, but also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.

Step 4: Break The Cost Of College Into Thirds
While some people can save and pay for the total cost of their child’s college education, most parents don’t fit into this category. Instead of letting that fact get you down, break the cost of college into thirds.

The first part is to save before your children head off to college. By starting early and having some help from the markets, you can accumulate a solid base to use for tuition as well as room and board. The next step is to plan on paying for about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, a part-time job for your child or contributions from the family. The final piece is student loans that your child or you can repay after they have completed their education. Since the goal is to minimize student loans, try to maximize the first two parts of this three-pronged strategy first.

Step 5: Stay On Top Of Things
Just like your 401(k) plan, you need to monitor your college planning investments. While in the early days of saving for college you will want to be more aggressive with your investments. As college draws closer, the investment allocation should become more conservative, just like a retirement account. It is also helpful to monitor your balances, keep an eye on the changing college costs, and track your progress towards your goal.

WKFCU offers Traditional, Roth and Educational IRA Accounts.

For information on the Summer Kid’s Bash during July, celebrating our youngest members, go to our website, www.wkfcu.org.