When it comes to the cost of higher education, we have seen a 538% rise since 1985, whereas the medical costs have jumped 286% and the consumer price index reached 121%. This indicates that the higher education now is about 4.5 times more expensive than it was 30 years ago.
Today, the situation is quite alarming as debts are rising for students. Perhaps this is an indication for all those proud parents out there to start saving for your child’s future.
As we can speculate that the situation can worsen, here on we need to start the planning. Why take any other example when I am also a victim of heavy college loan and its interest rate. However, through a study I came to know that I am not the only one (a bit relaxing). It stated that there are several graduates who are overloaded with a debt of student loan debt. These facts were a bit shocking as according to them 19% of the loan takers owe more than $50,000 graduation loan (I can empathise).
This is quite an expensive goal. This is quite a difficult task as there are several parents who still have to pay their own loans. On the top of it, finaid.org states that if the inflation goes up with the same pace, children those are born in the twentieth century might end up paying around four times of the current tuition fees.
Therefore, here, we will discuss the best strategy and child plans that can help you save for your child’s future.
Compound Interest Is Your Friend
If you are waiting for the right time to start saving for your little one’s education then you need to know that it is the very day they were born. Saving right from the beginning will help you ease your burden as you need to save around $250 for a month for a local public college, $400 for a public college, and a private college requires $500 for a month.Further, if you are also planning for an early retirement then you planning for your child’s education will add on to the burden.
If this is the case with you then you can rely on compound interest. The reason being is that interest earned early will help you to earn interest from then on. Consequently, you can get heavy gains if you have started your investment quite early. Wherein, if you will procrastinate your savings, the interest will also get lesser and you will end up piling your burden. For example, let us suppose that you begin saving $250 every month since your child was born and at a rate of 6% return, the sum will swell to $97,330 by the time they are ready to take admission in a college. However, if you will leave the savings for their 10th birthday then you’ll have savings of only $30,862 to pay their college admission fees. This is where compound interest steps in and proves to be a saviour.
Plan your investment
Now that you have started saving early, start investing as well. If your risk tolerance is high and can stay invested for at least 5 to 6 years, go for equities that will fetch you quite a large amount of return on your investment. Allocate your assets depending on age. For example, invest in equities if you are quite young, but if you are above 35 years, it is better to invest in debts. This implies that you will have to start quite early if you want to go for an aggressive investment so that you can earn higher interest. As grow old and your child is about to enter the college, the asset allocation will mainly become debt-based.
529 Savings Plans
A 529 savings plan, also popular as Qualified Tuition Program, allows parents to effectively save for their child’s higher education without having to pay any taxes. There are different schemes under the 529 plan and their annual charges are different as well. If you carefully compare all these plans, you will be able to strike the best deal. The working of this plan is similarly to that of 401K or IRA, thus taxes will be levied on contributions, but the earnings are not. Contributions can be made to this account till your child is 18 years old. The accumulated money must be used till they reach the age of 30. Moreover, the best thing is that if your child does not decide to go to college, then you have the leverage to change the beneficiary.
Pay the Education fees using IRA
One of the most important advantages of using your IRA to pay for your child’s education is that IRA funds can be withdrawn without having to pay any additional charges. It is penalty-free if you use it to pay any of the educational expenses that are qualified.IRA, therefore, can to be used as a savings account for your child’s education as well. If your child does not wish to go to college, then these funds will not go in vain as they can be used for your retirement.
Another good idea is to open a savings account with your child’s name.However, having a savings account may have some unwanted disadvantage as well. Financial aid depends on assets from a year before you applied for the aid. When finding out the amount of financial aid needs to be given to award your child, the aid providers will first look into the savings account of your child along with all the funds your child has in other bank accounts. This implies that if you have already saved a large amount for your child, your child may not get any financial aid for his/her education.
Over to you!
There are a numberof ways to save money for your child’s higher education.The earlier you start investing the higher amount you will have in your corpus. So, you need to find out the best strategy to save and invest for the future of your child.Make a thorough analysis and pick out the strategy that best suits your investment needs.