How to Save Money on Kindergarten Tuition When Money Is Tight

Savings for college is one of the top financial priorities for most families, and also one of the most difficult to achieve given the enormous costs. Let’s take a look at our many options so we can put together a solid educational plan for our children.

How much to save on college

With so many other financial goals – including paying off debt, saving for contingencies, investing for our own retirement, and caring for our aging parents – it might seem impossible to simultaneously save money for our kids’ college education. (There is hardly room for entertainment , let alone textbooks and education.) Just look at one graph to see how the value of a college degree has skyrocketed and how much it is far above the average household salary:

According to the Council of Colleges, today the average total college tuition (including tuition, room and board, books, supplies, and transportation) is $ 22,826 per year for a state-owned public college or $ 44,750 per year for a private college. If the cost of education continues to rise by 400% +, our children will not have the opportunity to graduate in the future without significant debt.

I don’t want to scare you. I’m terribly worried. Let’s take a look at the world’s simplest college cost calculator together. Enter your child’s age, adjust the assumptions, and click the Calculate button to get a result similar to the one below:

Depending on your child’s age and whether you choose the average cost of a public or private university, you will need to set aside between a few hundred and a thousand dollars per month to fully cover your college tuition costs.

But here’s the good news: even saving one third of the expected college tuition costs can make a big difference . Instead of saving up for all four years of college, Mani says:

A more realistic goal is to try to save a third of your kids’ expected college expenses, suggests Mark Kantrowitz, author of the FAFSA book and senior vice president of the Edvisors Network. To do this for a baby born this year, you’ll need to set aside about $ 150 a month for a public college and $ 220 a month for a private college.

Wondering where the other two-thirds come from? The idea is to spread the remainder of the college tuition fees over life to make the high price more affordable. Thus, while one third comes from past income (in the form of what you have accumulated), another third comes from current income when tuition fees are due (along with grants and scholarships), and the last third comes from future income. (in the form of loans that you or your child will pay off later).

This gives you more time to fund your studies while helping you achieve other goals, such as funding your retirement account.

Most financial experts will warn you not to sacrifice your retirement savings to save your kids in college – after all, your kids can get loans for their education, but you can’t get a loan for retirement. But if helping your child with college is important to you — and you might get a tax credit from your college savings account — put at least some money into this college fund. As with retirement savings, every little bite helps, and starting early allows us to harness the power of compound interest . Every dollar saved before going to college saves at least $ 2 in debt payments after graduation, Money says.

Where to save for college

Now that you know how much to set aside, where should you put them? You have several options.

529 Plans

529 plans are the most common types of college savings accounts due to their tax benefits. Like Rota’s IRA for retirement , 529 plans allow the return on your investment to grow tax-free when you withdraw funds for qualified higher education spending.

Many states also offer tax credits on your contributions. They can be significant: Morningstar research found that, on average, additional savings from state tax credits are $ 87 per $ 1,000 invested, or 8.7%. See if your state offers tax benefits using this table before choosing a 529 plan; if you don’t offer many benefits, you might want to look at them as you can sign up for another state’s plan.

Besides the stand-alone 529 plans, there is another type of 529 plan: prepaid tuition plans . As the name suggests, you pay tuition fees up front to keep your current rates. A dozen states offer their own prepaid plans, but most are open to state residents only. The Simple Dollar underlines these government plans, including the attractive UMass plan that is open to everyone in the US and will give you back your investment, plus interest if your child goes to school in another state.

Private College Plan 529 is a prepaid national plan covering over 270 private colleges and universities in eleven states. You purchase certificates of study for 30 years at participating schools (of course, enrollment is not guaranteed). Duke, Princeton, MIT and Stanford are among the participating colleges in the Private College 529 plan.

What if your child won’t go to any of these colleges at all? With 529 tariff plans, you can keep money in your account and use it for another family member. Or, if you are withdrawing money for any reason other than paying for college education expenses, investment income will be subject to federal income tax plus an additional 10% tax penalty. For 529 prepaid plans, you can withdraw money from another non-participating school without penalty, but in most cases you will only receive your contributions, not interest increases.

Compare 529 planson Morningstar .

Coverdell Education Savings Accounts

Coverdell ESA is another tax-exempt education savings account. They do not offer the state tax credits that many 529 plans offer, but earnings are not subject to income tax as long as they are used for qualified withdrawals – and they include not only college expenses, but also K-12 and graduate school expenses. This gives you more flexibility. This can come in handy if your child is in junior high and looks like he might get a scholarship – you can channel more money towards high school expenses and / or set aside for graduate school. You can have 529 and Coverdell at the same time.

On the other hand, Coverdell has several limitations. You can only contribute $ 2,000 per year or pay 6% tax on any contributions in excess of this amount. Because of this low contribution limit, you need to be especially careful with any annual service fees charged by the investment firm that maintains the account; they can significantly eat up your overall return on investment.

In addition, you cannot deposit funds into the account after the beneficiary turns 18 and he / she must use the money before the age of 30 (otherwise he / she will receive 10% tax penalty and income tax). Finally, high-income individuals earning more than $ 110,000 (individual applicants) or $ 220,000 (joint applicants) may not be able to use a Coverdell account.

College Savings has a good comparison of Coverdell ESAs with 529 plans here .

IRA Rota

Roth IRAs are usually considered solely for retirement, but parents can also use them as a store of value in college. Any contributions you make to Roth can be withdrawn tax-free and free of penalties as long as they are used to cover related education costs such as tuition, books, room and board. The main benefit of using Roth to store college savings is flexibility: if your child is not attending college or receiving a full scholarship, your money can go towards retirement instead of being tied to a 529 plan, subject to up to a 10% penalty. You also have more investment opportunities than with the 529 plans.

However, there are also disadvantages. Roth IRAs are capped at $ 5,500 per year and are only available to co-applicants earning less than $ 176,000 per year. In addition, if your child needs financial assistance after the first year of receiving college money from the Roth IRA, this will count as income and could negatively impact financial assistance in the next year .

Finally, since your child is more likely to go to college before you retire, the investment you choose in a Roth IRA should be more conservative. If you end up spending that money on retirement rather than school, it could impact your overall return on your investment. (But hey, you still have money in your retirement fund!)

Other types of accounts

US savings bonds and UGMA / UTMA accounts are old college saving methods, but they really don’t make sense these days. Savings bond interest rates are terrible, and UTMA and UGMA (custody accounts) accounts only make sense if you are confident that your child will not need financial assistance .

How to save on college and other financial goals at the same time

Money suggests this strategy / procedure for distributing your savings budget:

If you live in one of the states or the District of Columbia that offers tax benefits:

1. Save in your 401 (k) until match with employer.
2. Debt repayment at high interest rates.
3. Create a six-month emergency reserve.
4. Save 529 college savings up to at least one third of your expected college tuition costs.
5. Deposit money into the Roth IRA (if you qualify) as this money can be used without a college penalty other than retirement.

If your state does not have tax benefits:

1. Save in your 401 (k) until match with employer.
2. Debt repayment at high interest rates.
3. Create a six-month emergency reserve.
4. Put money in a Roth IRA (if you qualify)
5. Save on College Savings 529.

You will notice that the first three steps are the same for both scenarios. The main difference is whether you can get the 529 State Tax Credit. If so, do it first; if not, choose Roth instead of 529. You can of course add Coverdell for more flexibility and adjust the plan to suit your family’s needs.

While it is definitely still possible to succeed without a college degree , overall research suggests that college is still worth it . Good luck with your planning!

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