In 1971, the average cost of tuition (in current U.S. dollars) was just under $500 at a public university and $1,832 for a private university. Compare that to $9,139 and $31,231, respectively, in 2016 and you see why it’s getting harder for parents to send their kids off to college.
Despite the rising costs, findings show millennial college graduates are earning, per year, about $17,500 more than employed young adults holding only a high school diploma. Knowing this, many parents back themselves into a financial corner to make sure their kids can go to college.
While college is a good way to set them up for success, there are many ways to do so without breaking the bank.
In 1996, 529 plans were established to encourage saving for future college costs through tax-based incentives. All 50 states offer 529 plans, but each state has its own specific tax incentives on top of federal ones. With these plans, money is put into a fund and invested through one of the options your state offers.
Earnings from these investments grow free from federal taxes and are not federally taxed when the money is taken out to pay for college. If the money is taken out for non-college expenses, it will be taxed.
There are two types of 529 plans: Prepaid Tuition Plan and College Savings Plan, but not all states offer both options. It is important to find out which option is offered in your state and fully understand its benefits.
Here is how the U.S. Securities and Exchange Commission breaks down the two plans:
- Locks in tuition prices at eligible public/private universities and colleges
- Most plans are guaranteed or backed by the state
- Covers tuition and mandatory fees only
- Imposes age/grade limit for beneficiary
- Requires owner or beneficiary to be state resident
- Has a limited enrollment period
College Savings Plans
- Imposes no lock on college costs
- Has no state guarantee; subject to market risk
- Covers tuition, room and board, mandatory fees, books and computers
- Has no age limit; open to adults and children
- Has no residency requirements (may have to go through financial advisors or brokers)
- Enrollment is open all year
- Has a contribution limit in excess of $200,000
To open a 529 account, you can go directly through your state’s website or through a financial advisor.
As mortgage rates remain low, refinancing is an option that can save homeowners a lot of money. Refinancing to lower monthly payments or to pay off your mortgage faster will help you save for your child’s education.
Depending on your long-term goals and current financial situation, a custom-term mortgage may make sense. You have the option to take a new loan out for anywhere between 8 – 30 years.
For example, if you have 20 years left on your current loan but are not willing to hit the reset button and start again with a 30-year fixed but still want to be on pace for your financial goals, this might be a good option for you. In the long run, this option will save you more money than paying off the loan over an extended period of time.
Once it is paid off, you’ll no longer have to worry about a monthly mortgage payment. You can take the money freed up by lowering your payment and invest it into a 529 plan.
If you are interested in refinancing, get started today by contacting one of our Home Loan Experts.
Fidelity Reward Cards
Similar to credit cards that offer cash back and frequent flyer miles, you can open a rewards card to save for college. Through Visa, Fidelity offers a reward card that ties back into a 529 account you have set up with them.
The card offers 2% cash back on purchases, which is deposited into your Fidelity investment account automatically. Another perk is loved ones can link their cards to fund the 529 account as well.
If you choose to get a credit card, make sure to spend in a manner where you can pay the entire bill every month. Don’t put yourself into credit card debt in an effort to save for a college fund.
Saving for college will take time, but it’s a goal that can be achieved. The keys to success are to start saving early and to save smart. Review all your options to see what works best for you!
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