But where do you start? Let TDECU walk you through the steps of creating an education savings plan so you can ensure your child has the financial resources they need for a bright future.
The Importance of Starting a College Fund Early
Time is your biggest ally in saving for your child’s education. The earlier you start, the more time your money can grow. Consider this: according to the College Board, the average cost of tuition and fees for the 2023-2024 school year was $11,260 at public colleges (in-state) and $41,540 at private colleges. Unless the state of higher education changes dramatically, you can expect the cost of college to increase by 3 percent to 5 percent for the foreseeable future. TDECU takes this into consideration when planning your education goals. Starting early allows you to take advantage of compound interest, which can significantly increase your savings. If you have an 18-year-old student who plans to attend the University of Texas at Austin for four years beginning in 2024, the calculator estimates that you will need to save $117,624, including room and board.
These numbers can easily overwhelm you, especially if you are already juggling other financial concerns. The longer you delay, the more difficult it may be to reach your funding goal. Even if you can only afford to begin putting away a small sum, saving on a regular basis may pay off in the long run.
Moreover, starting early reduces the financial burden as your child approaches college age. Rather than scrambling to find funds or taking out large loans, you will have a well-prepared education savings account to cover these expenses. This foresight secures your child's educational future and provides peace of mind for your family.
How much will my child’s education cost?
Before you begin saving, it is important to set clear, realistic goals. This involves researching the average tuition costs, books, housing, and other expenses at the colleges your child might attend. Websites like CollegeData can provide updated information on these costs.
Once you have an idea of the total cost, break it down into manageable annual savings targets. For instance, if you estimate that you will need $100,000 by the time your child starts college and you have 18 years to save, you will need to save around $5,555 per year. Setting these specific targets helps you stay on track and makes the goal seem more attainable.
Explore Different Savings Options
There are several types of education savings plans to consider, each with its own advantages. Here are some popular options:
529 Plans
A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. The money you contribute grows tax-free, and withdrawals for qualified education expenses are also tax-free. There are two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to lock in current tuition rates, while education savings plans invest your contributions in various financial instruments.
State-Sponsored 529 Plans
Many states are beginning to adopt 529 plans, which are named for the section of the Internal Revenue Code (IRC) under which they are established. Although many details of these plans vary by state, they generally come in two forms: Prepaid tuition programs allow participants to “lock in” tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. The contract value may also be applied to private or out-of-state schools (although possibly not at full value, depending on the state). Savings programs allow contributions to vary and can be applied at any accredited institution of higher education nationwide.
Education Savings Accounts (ESAs)
Also known as Coverdell ESAs, these accounts offer tax-free growth and tax-free withdrawals for education expenses. Unlike 529 plans, ESAs have a contribution limit of $2,000 per year per beneficiary. They also provide more flexibility in investment choices, which can be a significant advantage for some families.
Custodial Accounts
Custodial accounts, such as Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts, are another option. These accounts are set up in your child’s name, and the funds can be used for any purpose, not just education. However, once your child reaches the age of majority (typically 18 or 21), they gain complete control of the funds, which might be a consideration for some parents.
Tax Credits
The American Opportunity Credit gives families a maximum tuition credit of $2,500 per year per student for the first four years of post-secondary education—100% of the first $2,000 of tuition, and 25% of expenses in excess of $2,000. The Lifetime Learning Credit gives a 20% credit toward the first $10,000 of qualified education expenses (tuition and/or other educational expenses incurred to learn or improve job skills). This credit is available to college juniors and seniors, graduate students, and working Americans. Using one of these credits offsets the use of the other.
Make Regular Savings Contributions
Once you have chosen the right savings plan, making regular contributions is important. Treat your child’s education fund like any other essential monthly expense. Automate your savings by setting up regular transfers from your checking account to your education savings account. This ensures consistency and helps you avoid the temptation to skip contributions.
Use windfalls like tax refunds, bonuses, or gifts to boost your education fund. Every extra dollar you can contribute will help grow your savings and bring you closer to your goal.
Invest Wisely
The key to growing your education fund is smart investing. While it is essential to be cautious, especially with your child's future on the line, taking calculated risks can significantly enhance your savings. Diversify your investments across stocks, bonds, and other assets to minimize risk. A financial advisor can provide personalized advice based on your financial situation and goals.
Keep an eye on your investments and adjust your strategy as needed. As your child approaches college age, it might be wise to shift to more conservative investments to protect your savings from market volatility.
Monitor Your Education Fund’s Progress and Adjust as Needed
Regularly monitoring your progress is crucial. You can
- Set up annual reviews of your education savings plan to ensure you are on track.
- Adjust your contributions or investment strategy based on your financial and market conditions.
- Use online calculators and financial planning tools to help you track your progress and make necessary adjustments.
- Monitor potential changes in college costs and financial aid policies.
Staying informed will help you make better decisions to adjust your savings plan accordingly. Financial aid usually comes in the form of loans and may not cover the total college costs. Even if your child qualifies for financial aid based on need, there is no guarantee your chosen college will have sufficient funds to help all who fit that category.
Explore Scholarships and Grants
While saving for college is important, scholarships and grants can significantly reduce the amount you need to save. Encourage your child to excel academically and participate in extracurricular activities, as many scholarships are awarded based on merit. Websites like Fastweb and the U.S. Department of Education’s Federal Student Aid provide hundreds of available scholarships and are updated regularly.
Grants, similar to scholarships, are money provided by the U.S. Department of Education that generally does not have to be repaid. Grants, as well as all Federal Student Aid, start with filing a Free Application for Federal Student Aid (shortened to FAFSA®). The most recognizable grant is the Federal Pell Grant, which is given to undergraduate students who display a strong financial need. But there are many grant opportunities available, and they can be found with a little research. The Federal Work-Study Program provides jobs for students with financial need, allowing them to earn money to put toward their expenses.
Applying for scholarships and grants should be ongoing throughout your child’s high school years. Every dollar awarded is one less dollar you need to save or borrow. Many scholarships—both large and small—exist, yet there is no way to predict whether your child will qualify for one or receive one even if he or she is eligible. Scholarship opportunities are available locally, statewide, and nationwide.
TDECU offers a multiple $1,500 scholarships to graduating seniors awarded based on financial need, academic performance, demonstrated leadership, participation in school and community activities.
Teaching Your Child Financial Responsibility
As you plan and save for your child’s education, it is equally important to teach them about financial responsibility. Educate them about the costs of college and the value of their education savings plan. Encourage them to save some of their allowance or earnings from part-time jobs to contribute to their education fund.
Teaching your child about budgeting, saving, and the responsible use of credit will equip them with the skills to manage their finances effectively in college and beyond. This will help them appreciate the effort you've put into saving for their education and prepare them for a financially stable future.
Secure Your Child’s Educational Future
Planning your child’s education fund may seem daunting, but it is entirely achievable with a clear plan and consistent effort. Start early, set realistic goals, explore different savings options, make regular contributions, invest wisely, and monitor your progress. Look into scholarships and grants, and teach your child about financial responsibility.
By taking these steps, you can ensure that your child has the financial resources they need to pursue their educational dreams without the burden of overwhelming debt. Remember, now is the best time to start saving for your child's education. Secure your child's educational future with a well-thought-out savings plan, and watch as your efforts pave the way for their success.
Ready to start saving for your child's educational future? Contact TDECU Wealth Advisors today to explore our education savings plans and get personalized advice from our financial experts. Secure your child's educational future with TDECU.
For more information on 529 plans, visit the U.S. Securities and Exchange Commission. To learn more about Education Savings Accounts, check out the Internal Revenue Service. For scholarship opportunities, visit Federal Student Aid.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. All information is believed to be from reliable sources; however TDECU makes no representation as to its completeness or accuracy.