Saving for College " The How To Approach"
Saving for college “The how to Approach"
Written by: Ayden Masudi
Parents typically have a lot on their plates. In addition to juggling life's daily events, parents also must keep their eyes on the future, which typically involves planning for retirement and saving money for their kids' college educations. Though both rank high on many parents' priority lists, parents should approach college savings much differently than they do retirement savings.* Prioritize retirement savings over saving for college. Some parents might feel a degree of guilt if they deposit more money into their retirement accounts each month than they do into their kids' college funds. But such a strategy is nothing to feel guilty about. College students who take out loans have a lifetime ahead of them to repay those loans, while their parents have far less time to grow their retirement savings. No parent wants their child to be saddled with debt after they earn their degree, but that does not mean parents should sacrifice security in their golden years just so their child can have minimal or no debt when they graduate from college. Studies show that the average college graduate still earns roughly a million dollars more over his or her lifetime than someone with just a high school diploma, so a college diploma still offers financial incentives that can soften the blow of repaying college loans.* Look into college savings plans. Simply socking money away in a savings account is no longer enough to finance a college education. That's because interest rates on standard savings accounts are very low, and as The College Board(R) notes, the college tuition rate of increase is substantially higher than the general inflation rate. In addition, according to The College Board, the average 2013-14 tuition increase was 3.8 percent at private colleges and 2.9 percent at public universities. Both of those figures are higher than the average increase in personal incomes, meaning parents are earning less while tuition costs are rising. So parents who want to finance all or some of their kids' college tuitions need to be more creative.College education savings plans are an option, and many, including a Coverdell Education Savings Account and the popular 529 Savings Plan, allow earnings in the account to grow tax-free. Even withdrawals from college savings plans are typically tax-free so long as those withdrawals are used to finance educational expenses. (Note: Rules vary depending on the type of account, so parents should not assume all withdrawals are tax-free.) But college savings plans can also have an impact on a student's financial aid eligibility, as these investments are often treated as parental assets (retirement account assets are typically not considered parental assets when determining a student's eligibility for financial aid). So parents should explore all of the ins and outs of the various college savings plans available to them before opening any accounts.* Encourage students to save for their own expenses. Many high school students are not in a position to work a lot or even at all during a school year. And working too much may ultimately affect students' performance in the classroom. But parents can allow kids to work during summer vacations, and encourage youngsters to save a substantial amount of their earnings from summer jobs. This can teach kids valuable lessons about money management, and money kids save from summer jobs can be used to pay for additional expenses that do not fall under the umbrella of college tuition, including books, food or even housing.Saving for their children's college education is a priority for many parents, and there are various ways parents can do just that without sacrificing their retirements.