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How To Save on College Expenses

 

How To Save on College Expenses

One of the biggest expenses a family will have is saving for college expenses. We’ve heard for years that it is recommended to save often and save early. The reason being is that tuition prices are on the rise, and ultimately it’s not really something we know how much we’ll spend on it until we get there. Will your children start off at a 2-year college or go to a 4-year college right away? What if they get accepted to an ivy league school or dream of being a surgeon or lawyer which takes them beyond the anticipated four years?

With all these questions left unanswered, we can only plan ahead as best as possible, stash away as much money as we can, and hope for the best. So, to help ease some of that concern, what can we do now to prepare for the expenses we will face of our child(ren) going off to college? Here are some money saving tips that can help you along the way so that you’re financially prepared when the time arrives.

Save Early, Save Often

I’ve already mentioned it, but it’s worth expanding on. If you start saving sooner rather than later, about one-third of the savings fund’s size will come from earnings. However, if you wait until your child is in high school to start saving, less than 10% will come from earnings. It actually pays here to plan ahead.

Always Apply for Financial Aid

The government offers a lot of free money, and you don’t know if you’ll qualify until you apply. Take advantage of resources that are being offered and be sure to apply right away. You’ll specifically want to look at options that do not require you to pay the money back like Federal Student Aid (FAFSA) or the Pell Grant. Of course, there are other scholarships and grants available, so be sure to do your research and see which ones your student may qualify for.

Know What Counts

When a student’s financial aid eligibility is analyzed, the student’s EFC or expected family contribution is the amount the family is expected to pay. You should understand how different assets your family has may count towards the EFC. For example, a typical EFC is 20% of a student’s assets, 50% of a student’s income, and 22-47% of the parent’s income. So, for example, institutions exclude the value of 401k plans, individual retirement accounts, and insurance policies. Home equity is also typically left out, although some private universities are starting to include it. It is these specific assets that you’ll need to look at to see what income will actually be counted towards your student’s EFC.

Open a 529 Account

A 529 account is a great way to save for college because the earnings accrue tax-free and qualified education expenses can be made with tax-free withdrawals. The 529 account is also ever-expanding in benefits while many states are working to reduce the cost and expand investment options. For example, consider who actually owns the 529 account. If the account is owned by the student’s parent, 6% of the value will count towards the EFC. However, if a grandparent owns the account, none of the value will be counted toward the EFC.

Consider a Roth IRA

We typically see a Roth IRA being used as a retirement savings account. However, it can also be used for college. Similar to a 529 account, money is contributed after tax and any investment gains can be withdrawn later fax-free and penalty-free to pay for qualifying educational expenses after five years. There are income and contribution limits for a Roth IRA though. Single taxpayers making more than $129,000 per year or married couples making more than $191,000 are not eligible, and you can only contribute $5,500 per year. However, if you’re over the age of 50 that contribution amount jumps to $6,500 per year.

Put Tax Credits to Work

There are education-related tax credits and deductions available from the IRS. Some include the Hope Scholarship and Lifetime Learning credits. There are also deductions for tuition, fees, and student loan interest. Learn more about each option to see if you qualify and can reduce your tax bill just because you’re paying for a college education.

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