How to Save for Your Kid’s College

Saving for a child’s college experience is one of the most expensive costs you will incur.

It is up there with paying for a home, new vehicles, and affording to live in retirement.

So, what are the different ways you can afford this expense?

Ways to Save

The above list is made up of some of the most popular ways.

Realistically you will rely on a combination of some or all of these different options.

On a positive note, if you have younger children, the more you save and invest now the more affordable their college will be in the future.

If your kids are older and you have not started yet, do not panic. I will address some options for you to help afford their college expenses.

Loans

There are two types of loans you can take out for school – Federal and private.

Federal loans are backed by the government and come as both subsidized and unsubsidized loans.

The biggest difference between the two is that subsidized loans you do not need to make payments on until after graduation and interest will not be added to the loans.

Unsubsidized loans have their interest, capitalized or added to the principal loan balance if you do not make payments.

If you are forced to, at least make interest payments on these loans while your child is in school. It will save them in the long run.

Private loans are loans you take with banks. They typically have lower interest rates than Federal loans. But their interest rates tend to be variable.

When the Fed raises rates, like it is doing today, these can become very expensive.

You will likely have to make interest payments at minimum while your child is in school. It is recommended to do so or pay even more to pay off the principal as well.

Scholarships & Grants

Scholarships and grants are the holy grail of paying for college.

This is because it is money given to you for free to attend.

Encourage your child to apply to schools where they would be considered at the top of their class. They will likely earn more in scholarship money at these schools.

Also encourage your child to participate in athletics and other activities that could result in scholarship money as well.

Grants are money given to students from the government. They are typically given to students in low-income households.

This helps these families afford college, which otherwise may be out of reach.

This is a great way schools can diversify their talent pool and bring in students without financial resources.

College Savings Accounts

These are investment accounts that you set up for the specific purpose of college.

Today many people utilize a 529 to pay for their kids to go to school.

The concept of a 529 is simple. Contribute money, watch it grow, and as long as you use it for a qualified education expense you do not pay taxes on the gains.

The contributions may be tax deductible depending on which state you live in and which state plan you choose. Consult a tax accountant.

Also, if you do not use all of the funds in a 529 for one child it can be transferred into another child’s name. That way you do not have to pay the 10% penalty and taxes on distributions not used for qualified expenses.

Custodial Accounts

Custodial accounts are investment accounts set up in your child’s name that you manage.

You simply contribute, pick and investment strategy, and watch the money grow.

The drawback here is that the gains are taxable. Regardless of whether they are used for school or not.

On a more positive note, there are more investment options in custodial accounts and no penalty if you do not use the funds for school.

Many parents have expressed concerns with 529s when I meet with them because of their limited flexibility.

Custodial accounts are a great way to have more flexibility with your money because they can be used for so much more than just college.

Income

The final option is to pay for school with the income you earn.

If you make enough money, you may be able to pay for school each year from your job.

Realistically this is not the optimal strategy but can be used to supplement other strategies above.

Optimal Strategy

Assuming your child does not earn a full ride scholarship for school there is any optimal way to pay for it.

Save as much money as you can ahead of your kid going to school and invest it.

Chooce whether a 529 or custodial plan makes more sense for you, and once you do hire and advisor to help pick your investment strategy.

Once your child is in school, forecast total expenses while they are there. Look at the funds you have saved and calculate that difference.

After you know the difference, determine how much you can pay from your income over the four years and subtract that from the balance.

Take out loans for the rest of the balance.

It is that simple.

A Quick Note

There are more complex strategies involving things like life insurance to save for college.

The list above is the way most people can afford it.

If you would like to learn more about some of the more complex strategies, join my blog and schedule your free consultation.

How are you saving for your kids to go to school?