Saving for College at Any Stage in Life
According to Sallie Mae’s recent How America Pays for College report, the average amount families paid for college in 2017 was $23,757. This is no small chunk of change, and their research shows that students and parents share nearly equal responsibility for covering college costs.
We know many of you are working to address the financial issues families saving for college face every day, so this partner packet focuses on this significant expense and provides tips and advice for you to use to help students and their parents plan and save.
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How to get a head start on saving for college
By America Saves
How do we save for college?
By Invite Education
Three ways to cut costs in college
By Illinois Saves
By Madeline Daniels, America Saves
The average amount families paid for college in 2017 was $23,757, according to Sallie Mae’s recent How America Pays for College report.
Their research shows that students and parents share nearly equal responsibility for covering college costs. While the good news is that scholarships and grants are covering the largest share of these costs in a decade (35 percent), 23 percent is covered by parents’ income or savings, 19 percent is covered by student loan borrowing, and just 11 percent is covered by the students’ income and savings.
It’s no secret that the trick to borrowing less is saving more. But college savings can actually help future college students do more than take on less debt. Children with college savings are actually four times more likely to attend.
Need help getting your family started? Here are three things you need to know to get you on the path toward college savings success.
1. Make a college savings plan
Most families expect their child to go to college, but only two out of five families have a plan for how to afford it.
Notably, families with a plan contribute three times more from parent income and savings than families without a plan, according to Sallie Mae. That’s consistent with the America Saves 2017 household savings survey, which shows that savers with a plan are over twice as likely to be making good or excellent progress meeting their savings needs.
This is where the America Saves Pledge comes in. When you take the pledge, you create a simple savings plan and set an education savings goal. Then the non-profit campaign keeps you motivated with relevant advice, tips, and reminders to help you reach your goal. Think of it as your own personal support system.
2. Start saving at the baby shower
We like to say it’s never too early to start saving for college. Instead of more toys and clothes, ask for contributions to your child’s college fund at the baby shower.
A 529 plan can be opened as early as birth. It’s a tax-advantaged savings plan designed to encourage saving for future college costs that is sponsored by a state, state agency, or educational institution. That means that interest earnings are free from federal and state income-taxes. Thanks to compound interest by the time you’re carrying the extra-long twin sheets into the freshman dorms, that money could be worth up to three times more than money invested in high school.
While every state and the District of Columbia offers some kind of college savings plan, the benefits can vary. Just keep in mind that not all 529 plans are created equal, so do your research and comparison shop. Traditional savings or investment accounts, Coverdell Education Savings Accounts, savings bonds, and child savings accounts are also commonly used.
But while it’s never too early to start saving for college, it’s also never too late. Even a small amount of savings (under $500) can make a student four times more likely to graduate.
3. Budget realistically
With college costs continually on the rise, it’s difficult to estimate what the price of college attendance will look like many years from now. But there are many factors you can plan for.
The first is graduation time. The idea that a bachelor’s degree takes four years to complete is more myth than reality, with the average completion time being six years. That’s two additional years of tuition, fees, food, housing, school supplies, and expenses you should be budgeting for.
Another factor is understanding the differences between sticker price and the actual cost of attendance. Because of financial aid packages, including government loans and grants, few students actually pay the published price. You can get a better picture of what most actually pay by using the U.S. Department of Education’s College Scorecard to compare the average net prices and things like average debt students leave a school with, graduation rates, and earnings after graduation.
To learn about the expenses you can plan for in advance, check out Better Money Habit’s video on how to estimate your child’s cost of attendance.
By Invite Education staff
Parents want the best for their children, which often includes a college education. Some new graduates leave campus with a diploma in one hand and a huge student loan bill in the other. Parents want their graduates to leave school with minimal debt.
There are about as many answers as there are families. Below are a few common ways to help save and pay for college, and the pluses and minuses of each to help make informed decisions.
Whatever you choose, remember that by saving today, you give your money the most time to grow before school bills arrive.
College savings plans are opened and administered for a beneficiary (usually a child) by an account holder (usually a parent) who directs the investments. Investment options may include money market funds as well as stock and bond mutual funds. Some have age-based portfolios that shift money between types of investments, becoming more conservative as the beneficiary approaches college age. College savings plans, along with prepaid tuition plans, are a type of “529 Plan”—named for Section 529 of the Tax Code, which created those plans.
Pluses: Investment earnings are tax-deferred, and withdrawals are tax-free, if used at more than 7,000 schools in the United States and abroad for qualified education spending (such as tuition, mandatory fees, room and board, and required books and computers); No residency requirements; Year-round enrollment; No age limits (adults returning to school can benefit).
Minuses: No lock on college costs; Investments are not guaranteed (funds may lose value).
Prepaid tuition plans lock in costs at today’s prices at participating colleges and universities. Costs often include tuition, mandatory fees, and sometimes room & board. While these are usually state-sponsored programs for schools in the state’s college system, some private colleges and universities also offer prepaid tuition plans. Most plans require an initial lump-sum investment, plus regular installment payments based on the age of beneficiary when the account is created and the number of years of college purchased. Prepaid tuition plans are a type of “529 Plan”—named for the same Section 529 in the Tax Code that created 529 college savings plans.
Pluses: Locks many college costs at today’s rates; State governments often guarantee the investments.
Minuses: May have residency requirements; School choices may be limited; Most plans have a limited enrollment period; Most plans have age/grade limits for beneficiaries.
Coverdell Education Savings Accounts or ESAs, sometimes called “education IRAs,” are similar to college savings 529 Plans. Available to families with a modified adjusted gross income of less than $110,000 ($220,000 if filing jointly), they differ from 529 Plans in that they also can be used for private elementary and secondary school as well as college expenses. Coverdell ESAs enable families to save—within contribution limits—with taxes deferred on the investments, and tax-free withdrawals, if used for eligible educational expenses. Existing Coverdell ESAs can be rolled into a 529 Plan, as funding a 529 Plan is considered a qualified education expense.
Pluses: Can be used for private elementary and secondary school as well as college; Investment earnings are tax-deferred; Withdrawals are tax-free, if used for qualified education spending; Investment options are almost unlimited; Can be established at many financial institutions including brokerage firms and mutual-fund companies.
Minuses: Annual contribution limited to $2,000 per year per beneficiary – total from all sources, for example $1,000 from the parent(s) and $500 each from two grandparents; Income limits make some families ineligible.
The Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act allow assets such as stocks, bonds, real estate, and even fine art to a child. Sometimes known as UGMA and UTMA, these accounts are administered by the gift giver or an appointed custodian until the child reaches adulthood (age 18 or 21, depending on the state). The assets become the child’s property and can be used to help pay for college.
Pluses: Investment income is taxed at the child’s (usually lower) tax rate.
Minuses: Not offered in every state; Since the transferred assets belong to the child, their value may affect financial aid eligibility.
Those are the most common ways available to most families to save and pay for college. When you decide which is the best for your family’s situation, remember that time is one of the best ways to have your money grow. The sooner you start saving, the more time the money will have to grow, and the less your family will need to borrow for college.
America Saves Week (Feb. 26-March 3, 2018) is an excellent time to think about—and start—saving for college. As Invite Education always says: “Saving a dollar today is better than borrowing one tomorrow.”
By Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.
Typically people think of spending—not saving—while in college. It’s true that once you choose where to attend school, your tuition and fees costs are fixed. However, at many schools tuition and fees may be less than half of your overall costs.
According to the National Center for Education Statistics, public four-year, in-state costs in 2015-16 for students totaled $19,189 and tuition and fees was only 46 percent of the total costs; room and board was the remaining amount. Add in other costs, such as fun, clothing, and toiletries, and tuition and fees is an even smaller percent.
You can save money on these “other” costs while in college. Let’s look at three strategies used by college students and you can choose which one fits your lifestyle the best!
Small Items Add Up
We often pay attention to large purchases, but may not notice when we spend small amounts of money. However, small purchases that we make regularly do add up, and it can make a big difference over time. Look how much these purchases add up over a year. Do any of the following expenses resonate with you?
- One snack item a day, at $1.25, is $465.25 in a year
- Parking meter charges for eight hours a week ($8.00) add up $416.
- A pack of cigarettes a day ($7.50 per pack) costs $2,737.50.
- Lunch out five times a week ($8.00 per lunch) costs $2,080.
Multiple these amounts times four years of college and the amount of student loans needed to cover these costs is significant. Stepping down how often you incur these costs helps. Think about what small costs you have regularly and what action you’d like to take to save money.
Big Expenses Matter
Rent, internet fees, insurance, and cell phone plans are common, big dollar items for college students. Before signing a contract for any of these items, take time to comparison shop. For example, apartment leases vary significantly in college communities depending on where the apartment is located, amenities, size and more. Decide what you specifically need (versus want), compare prices, and consider alternatives before you sign a lease.
University of Illinois’ Tenant Union’s A Quick Guide to Renting Apartments has a housing cost comparison worksheet as well as an apartment hunting checklist that are both excellent tools to help you save money. Don’t forget to also comparison shop for other big expenses.
Plan Your Discretionary/Fun Spending
College is a wonderful opportunity to try new experiences and have fun. You want to have your money last all year so that you can continue to have fun in the spring, and not run out of money in November! Plan how much money you can comfortably spend each week. Here are some tried and true student strategies:
- Decide how much you want to spend on Friday night (or for fun during the week) and carry cash for this amount. When the cash is gone, the spending stops.
- Keep receipts in an envelope and add up the amount each week.
- Use a budget sheet like Making it On a College Budget, or one you customize to fit your needs.
- Use a budgeting app to track spending.
Here’s a bonus saving strategy! Peer Educators from University of Illinois Extension’s Financial Wellness for College Students program have compiled 55 Ways to Save Money from their own experiences. Take a look at this list and circle 10 or more tips that you can implement!
Whether you pay attention to small amounts, comparison shop for big items or plan your fun, you can spend less while in college and ultimately save money for yourself. Using these saving strategies will allow you to set aside money in a savings account for those unexpected costs and opportunities that are sure to arise. College is the perfect place to build your saving habits—you can do it and reap the benefits.
Share the following messages with your followers.
Please join @AmericaSaves, @InviteEducation, @SallieMae, @ILStudentMoney, @FinWellnessUIE, and others on Tuesday, November 7 at 2pm Eastern for a 45-minute discussion on saving and paying for college.
Student loan debt in America has grown to over $1 trillion. With more and more young people planning on attending college at higher and higher prices, education and debt are quickly becoming national priorities. Please join our conversation on how to best pay and save for education, and strategies for budgeting and making a plan, from cradle to graduation.
Topic: Saving for College at Any Stage in Life
These questions will be featured in the discussion:
- Q1: When is the best time to start saving for college?
- Q2: What are some ways college savings benefit future students?
- Q3: Is it worth it to save if you can only afford to put aside a modest amount?
- Q4: What can families do in high school to minimize college costs?
- Q5: What is your favorite resource on finding an affordable college education?
- Q6: What’s the difference between sticker price and the true cost of college?
- Q7: What are some unexpected costs of college attendance?
From America Saves
- 5 ways to make college more affordable
- Careful Considerations for College Financing
- Dealing with Back to School Expenses
- How to Save or Work, and Minimize Student Loans. Yes, You Can Do It All.
- How Schools Can Help Students Save for College
- Is a 529 Plan the Right Savings Tool for You?
- Layering Certifications: Education without the Debt!
- Less Traditional (and Less Costly) College Options
- Making a Plan for College Savings
- Making the Most of #CollegeSavings
- Minimizing Your Child’s Student Debt
- Planning for College Expenses
- Saving for College, or Not! What I Wish I Knew Then
- Your four options for repaying student loans
Other Resources and Research
- College Scorecard, U.S. Department of Education
- FAFSA, Free Application for Federal Student Aid, U.S. Department of Education
- Financial Aid Toolkit, Federal Student Aid
- How America Pays for College 2017, Sallie Mae
- How America Saves for College 2016, Sallie Mae
- Know Before You Owe: Student loans project, Consumer Financial Protection Bureau (CFPB)
- Paying for College, CFPB
- Saving for College, FINRA
- The Link Between Savings and College Success, Prosperity Now
Better Money Habits Videos
- Applying for federal student aid
- Delaying student loan repayment with deferment or forbearance
- Estimating your child's cost of attendance
- How loan deferment works
- How to finance a return to college
- Income-based student loan repayment plans
- The math behind saving for college
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