How to Save for College

Posted: May 6, 2022 in Savings

College is one of the biggest investments anyone can make in their own lives or their children’s lives.

Unfortunately, paying for college is a struggle for most families. Only thirty-four percent of students get at least some money from their parents. The less money students have to borrow in the form of a loan, the better off they'll be when thinking about their future financial health.

The costs of college are not just tuition and housing. Students also may or may not need a vehicle, depending on where they go to school and how far away it is. They will definitely need things like textbooks, food, medication, etc. The average family spends between $1,700 and $3,300 per semester on other costs, including entertainment and extracurricular activities.

What About Financial Aid?

Yes, you should apply for all financial aids that your family is eligible for. Your student may be eligible for federal, state, and institution grants, federal loans, or work-study, depending on your income level. It's also worth finding out if your student is eligible for any merit or needs-based scholarships.

However, you should not count on financial aid. Many families are just outside the income band required, and grants, in particular, can be hard to obtain.

Why Save for College?

Far too many people are "underwater" on student loans. They often take years to pay back, and by the time you have paid them back, you have paid a lot in interest.

So, why should you save for college?

Only income is counted for financial aid purposes, not savings.
The money you save will earn interest, so instead of paying interest, you receive interest.

You should start saving as soon as possible. Many families start college savings account for babies. If your child decides not to go to college, the saved money can be used in other ways to help them start their adult life.

What is a 529 Plan?

A 529 plan is a specific college savings plan. They are offered by every state in the U.S. and the District of Columbia, although the details vary and come with significant tax advantages. There are two types of 529 plans.

529 Savings plans. These work the same way as other savings plans, but withdrawals can only be used for college and K-12 expenses. Additionally, 529 plans can be used for private school tuition. In 2019, this was expanded to include registered apprenticeship programs and $10,000 in student loan debt repayment. However, money withdrawn for other expenses is subject to taxes plus a 10% penalty, with exceptions for death or disability.
529 Prepaid tuition plans. These are limited and may only be applicable at specific colleges. The point, however, is to lock in tuition, which increases yearly.

If the 529 plan restrictions don't suit your family, you can always use other savings accounts or permanent life insurance.

How Much Does Your Child Need for College?

The amount of money you should be putting aside in savings depends on how old your child is and your planned budget. It's better, if possible, to put more away when your child is young.

Bear in mind that tuition tends to go up and that private universities are significantly more expensive than public universities. Many students save money by spending their first year or two at a local community college.

If you are saving for college, you should be considering a 529 plan. Your student will also want a checking account, and you should consider a student checking account with parental controls for high school and early college students. Also, consider a our rewards card, which pays rewards into a savings account.

To find out more about these offerings and get more personalized information about how best to save for your child's college expenses, contact ProFed Credit Union today.

Sources:

EVERFI, Inc. “Paying for College.” ProFed Credit Union Financial Education Powered by EVERFI, 2021, profedcu.everfi-next.net/student/dashboard/profed/proed-investing-in-future/1458#paying-for-college.

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