You understand the power of making smart investments. It can give you freedom and flexibility to do what you want. For many, a postsecondary education — either college or trade school — is one of the smartest investments you can make. It generates important intangible benefits such as broader experiences, cultural awareness and self-confidence — and of course, it often leads to higher earning power.
Four-year college or trade school
While a four-year college or university degree was once seen as a clear one-way ticket to a successful career, it doesn’t have the guarantee it once did. And it comes with a steep price. The average cost of college in the U.S. is more than $38,000 per year, including tuition and room and board.1
Increasingly, parent and their children are considering trade school due to its lower average cost of $15,187 a year.2 And it takes less time to enter their profession — 18 to 24 months compared to the four-plus years to earn a bachelor's degree. (Costs of course vary widely based on factors like the program being pursued and location.)
Although you know the value of a good education, helping your child pay for their education post high school can be a challenge. Making sound college funding strategies is important if you don’t want to dip too deep into your family’s savings or see your child get too far in debt.
Funding options
It helps to get creative in searching for help with post-secondary funding. Consider these options:
Grants and scholarships
Financial grants and scholarships can be helpful — but don’t count on them being a predictable source of funds. The terms “grants” and “scholarships” are often used interchangeably, but they are indeed different. Most grants are financial-needs based and most scholarships are merit based, meaning they are awarded to students with certain qualities, such as proven academic or athletic ability. Many scholarships also have rules — maintaining a certain GPA, for example — that you have to follow to continue receiving aid.
Both grants and scholarships come from a variety of sources, including state and local government, colleges and trade schools, private organizations. Doing your research can pay off.
Loans
Banks, civic organizations, colleges, and federal and state governments sponsor loan programs. There are, however, two main drawbacks to borrowing for college. The amount of the loan is limited by the family’s — or the student’s — ability to repay, as the loan plus interest becomes a long-term financial burden. The average federal student loan debt is $39,075 per borrower. And it may take borrowers close to 20 years to pay off their student loans.1
Family resources and savings
This category includes personal savings by students, parents, or other family members. And there are also tax advantageous financial vehicles (such as the 529 Savings Plan) your family can use for college expenses.
Getting started with college savings
If you have a child who may likely attend post-secondary education, start a funding plan as soon as possible. No matter how little or how much you put aside, the sooner you develop a systematic strategy, the more time you’ll have to accumulate the funds you need — and the faster your compound interest will grow.
When you set up your funding strategy, make sure that it is:
Realistic. You’ll need to know a rough estimate of how much college will cost. If you hope to send your now two-year-old daughter to an in-state college in 16 years, for example, how much should you expect to pay? Go to savingforcollege.com for an estimate.
Flexible. A good strategy offers a choice of funding vehicles to accommodate your risk tolerance, time frame and financial goals. Some are tax-deferred or offer other tax-related benefits.
Inflation-adjusted. Your college funding goal may be a moving target. Your strategy will need to be adjusted accordingly as college costs will change — and most likely increase — over time.
College funding considerations
A solid funding strategy will help keep you in check. There are plenty of other factors to think about when searching for the right financial vehicle, such as:
Control. Who should have control of the account now and in the future? You? Aunt Susan if something happens to you? Your child?
Flexibility. Are you unsure what the future holds or do you already know that your child is going to attend a specific school?
Financial aid. If you qualify, will there be an impact on financial aid eligibility?
Investment options. Are they broad or limited? And what types of investments do you prefer?
Estate planning. Some vehicles may not reduce your taxable estate. Others may offer significant estate planning benefits.
Taxation. Are the contributions tax-deductible? Tax-deferred? How will the distributions be taxed?
Additional considerations
Consider the above factors when thinking about the following funding vehicles:
529 College Savings Plans were introduced in 1996 as a way to help parents put away money for their child’s college expenses. The money grows tax-deferred and can be withdrawn tax-free if used to pay for qualified education expenses. These include tuition and fees, books and materials, internet access, room and board, and more.
Recent legislation opened up the 529 for use with a wider range of education and training programs like trade and vocational training, such a cosmetology school, plumbing, welding, electrical and other programs.3
A Coverdell Education Savings Account (ESA) is a trust or custodial account that can be used for elementary, secondary, or higher education expenses and set up for a designated beneficiary who is under the age of 18 or has special needs. Distributions from an ESA is tax-free as long as the funds are used for qualified expenses and do not exceed the beneficiary’s qualified education expense. The total annual contribution to a beneficiary’s account can’t exceed $2,000.4
A Roth IRA usually is synonymous with retirement. However, you can generally withdraw money from a Roth IRA to pay for qualified higher education expenses with no early distribution penalty applies. Keep in mind that earnings withdrawn prior to reaching age 59½ and/or not meeting the five-year holding period may be subject to a 10% penalty in addition to income tax. Carefully follow IRS rules.5
Permanent or whole life insurance provides the potential for death benefit protection for your entire life, while offering the ability to build and use cash value on a tax-advantaged basis for expenses such as college funding. Check with you financial professional to learn more.
Do your homework
Now that you know more about how you can pay for your child’s education, there’s still more to learn so you don’t leave money sitting on the table.
Detailed information about private and public college tuition, financial aid options, available scholarships, and college planning calculators are available at your fingertips. To get started, here are some helpful resources:
It’s never too soon to begin setting money aside for your child’s education. By starting early enough, you can reach your goal.
