It’s no secret that college is expensive, and tuition costs only seem to be rising. Luckily, with the right amount of planning and saving, it is possible to send your kids to a great college without breaking bank. Just ask these loan-free parents. Here’s how to plan wisely for your child’s college funds.
Birth through 7th grade:
From the time your child is born (or even before!), invest $50 a month in a college fund, such as a 529 plan, a state-sponsored investment account with tax advantages and possibly other incentives that make it easier to save for college or post-secondary education training. (You can use automatic payroll deductions if you’re not the conscientious type.) In 18 years, a fund that earns 6 percent a year will be worth about $20,000. And that much per child, along with $20,000 in student loans and some belt-tightening while your children are in college (about $5,000 per year, roughly what you already pay to feed, clothe, and shelter one teenager), should be enough to pay the average four-year tab, says certified financial planner Kevin McKinley.
It’s important to note that each state has its own 529 plans with differing funds available. Assess the performance of what a 529 plan in your state would look like long-term before committing. Other options include investing in mutual funds or growth stocks. Here’s what you need to know before investing in stocks. You may also consider a Roth IRA, a tax-advantage individual retirement account. These accounts are useful because if your child decides not to attend college, you can use the funds toward your retirement. However, they do have annual contribution limits.
8th through 10th grades:
If you don’t have any money saved at this point, a prepaid 529 plan, which protects against tuition increases, might be a good way to start. Only 18 states offer this option, it can be hard to transfer to new states, and you will incur penalties for early withdrawal in some states—scrutinize your state’s fees at collegesavings.org. By this time, your child may have a clearer idea of what sort of school he or she might want to attend. For students interested in a private university, the independent 529 plan is good at about 300 private, mostly small liberal arts colleges. Because college is five or fewer years away, reduce your exposure to stocks and add less-risky income investments like bonds, senior wealth advisor Jared Snider told CNN.
At this point, your child should also start applying for outside scholarships, monetary awards from various organizations that can be used at any school. Some scholarships may be a bit weird—There’s one for just being tall!—but if he or she starts applying for them early and often, that money could really add up. Websites like Fastweb and Scholarships.com are great places to start, but also consult a guidance counselor at your kid’s high school for advice.
11th and 12th grades:
Still haven’t managed to sock away tuition by now? The Federal Parent PLUS Loan program lends parents the balance of any costs minus any financial aid. You’ll pay 3 to 4 percent of the loan amount in fees and around 8.5 percent interest (it’s slightly lower if you borrow directly from the government at direct.ed.gov; ask if the college your child plans to attend participates in the program). Federal Pell Grants, which do not have to be repaid, offer a maximum of $5,775 per child, based on need. Most families that qualify earn less than $50,000. If your income is significantly higher but you have more than one child in college, you may still make the cut.
Once your child starts applying to colleges, make sure he or she also applies for scholarships from each individual school. Those funds could be the determining factor for where he or she will actually commit. Some schools offer automatic scholarships of a few thousand dollars just based on the applicant’s SAT or ACT scores and/or high school GPA.
Keep saving! If you’ve been using a 529 plan, don’t stop making those deposits once your child enrolls at a university. You may still get tax-free money while your kid is in school; just check your state’s rules about doing so. For more financial advice, check out how to make money fast and habits from people who are great at saving money.