A lot of dedication goes into saving for a child’s education. And with rising college costs and growing student debt levels, it can feel like an unachievable goal to afford college. However, with the right plan and the right information, affording college may be more achievable than you might think. That’s why RaptorFi created this guide: to simplify the process and show options for saving for college.

Let’s get started. 

College Savings Plans

There are a number of popular college savings plans available, each a little different. It’s important to understand the benefits of each before selecting one. 

529 College Savings Plan

This is perhaps the most popular, and certainly the most well-known option. It allows your family to put money in an investment account that can be used for various K-12 and college educational expenses. 

Like a Roth IRA, 529s works by investing your after-tax contributions in mutual funds or similar investments. It’s important to note that the growth of your 529 contributions will depend on the investment’s performance in the market. 

While nearly every state has a 529 college savings plan available, keep in mind that you can invest in other states’ plans, not just your own. Plans come with tax and financial aid benefits. 

Some of the benefits can include state income tax deduction, tax-deferred growth, and tax-free withdrawals if used for educational expenses.

A 529 Plan is a good idea if you’re…

  • Willing to accept the risks of investing in the market.
  • Interested in tax benefits.
  • Wanting to avoid beneficiary age-restrictions or enrollment period limitations.

Need help finding a 529 plan? RaptorFi has partnered with Raymond James – CR Wealth Management who is a responsible broker of 529 plans.

529 Prepaid Tuition Plan

Unlike the 529 college savings plan, a 529 prepaid tuition plan’s value doesn’t depend on the market. What you add today will be what is there tomorrow. Additionally, it allows you to prepay all, or part, of an in-state college’s tuition. Does your child want to go to a private or out-of-state college? There are options for that as well. 

For better or worse, the prepaid tuition plans are tied to the price of tuition at the time of opening the account. If prices go up, then you’re still paying the lower tuition. But if prices go down, you’re stuck with the original cost.

A 529 Prepaid Tuition plan is a good idea if you…

  • Want to lock in current tuition rates.
  • Desire State-backed plans. 
  • Are interested in tax benefits like tax-deferred account earnings. 

Coverdell ESA

A Coverdell Education Savings Account (ESA) is a special type of tax-deferred college savings account where individuals fund the educational expenses of a designated beneficiary. One bonus of an ESA is that the beneficiary does not necessarily have to be related to the account holder.

ESA benefits include tax-deferred growth and tax-free distributions for qualified educational expenses. But for every pro, there is a con. Money can only be deposited before the beneficiary’s 18th birthday. Additionally, while a beneficiary is allowed to have multiple Coverdell accounts, the combined amount contributed across all accounts for a beneficiary is $2,000 per year.

A Coverdell ESA is a good idea if you…

  • Have an unrelated beneficiary you want to help fund college.
  • Earn an income lower than the maximum limits ($95,000 for single households, $190,000 for married households).
  • Have multiple people to save for.

Personal Savings Account

If you prefer a more traditional approach to savings, a personal savings account is always an option. It does allow you to decide how the money’s spent and doesn’t so tightly limit you on the amount deposited or what the money can be used for. However, it also doesn’t come with tax benefits and generally has a lower, fixed interest rate. 

A Personal Savings account is a good idea if you…

  • Are confident in your financial saving habits.
  • Want more flexibility and fewer spending restrictions.
  • Don’t mind passing on tax benefits and market gains. 

How Much Money Do You Have To Save for College?

After you select your preferred savings method, the next question to tackle is: how much do you need to save for college? 

The Cost of College: Net Price vs. Sticker Price

Firstly, let’s talk about the cost of college, and how it may be different than you expect. Yale’s advertised price tag (also known as the sticker price) is $75,166 per year. But did you know that very few families pay that whole amount? In fact, the average annual institutional grant at Yale is worth $49,051 and 51% of Yale students receive an institutional grant. 

The cost you really want to pay attention to is your family’s net price. That’s what you are likely to pay after scholarships, grants, and other forms of aid are taken into consideration.

How Much Money to Save…

While there’s no one-size-fits-all approach or magic number when it comes to saving for college, there are a few important strategies to keep in mind. 

Set an End Goal: You can’t hit a target if you can’t see the target, right? So instead of aiming for saving “enough” choose a concrete number. You could base it off of the average cost of college or get more personalized estimates by using a college cost calculator. 

Commit to Monthly Payments: Once you have that goal amount, it’s time to break down the monthly costs. How much will you put into a savings plan or account each month? It’s ideal to have a standard number and stick to contributing that much every month, but life happens and sometimes you need a little flexibility. If you need to adjust the amount of contribution due to sudden expenses or the loss of a job, that’s ok.

Keep In Mind: Thanks to financial aid opportunities like scholarships, you likely won’t have to pay the total cost of college all on your own. While it’s key to save as much as you can for your student’s higher education, remember that there is gift aid out there to help fill the gaps. 

When Should You Start Saving For College?

The short answer: ASAP. Many suggest starting college savings before the child is even born. Some people advise asking for college savings gifts for baby showers or even for weddings. College is an expensive endeavor, so the earlier you start saving, the better. 

So what if that’s not as feasible? What if your kid is already ten? Is it too late? There’s an old Chinese proverb that goes “The best time to plant a tree was 20 years ago. The second best time is now.” So if you don’t already have a savings plan, start one today. Any amount will ultimately help. 

What if You Didn’t Save Enough for College?

There are many reasons why a family might not have saved enough for college–unexpected medical costs, financial woes, big life changes, etc.—whatever the cause, it’s ok. Fortunately, you’re not expected to pay the full cost of college completely by yourself. There are many ways to make college more affordable—from getting in-state tuition to scholarships. 

Let’s break down how to make college more affordable, even without much in the way of savings:

Finding an Affordable College

There are many factors to consider when selecting a college, and cost is often at the top of the list for students and their families.

The Right Fit: Finding the ideal college fit can actually save you money. By finding the right college for your student, they’re more likely to graduate on time (saving money in tuition fees), avoid transferring (which often adds extra semesters and thus extra costs), and the right college should also offer financial aid and fit reasonably within your financial means.

In-State: One of the most popular options for choosing an affordable college is to attend an in-state college. Public colleges typically offer in-state students a lower tuition rate. 

Community College First: Another option to consider is for students to attend a community college for 2 years, before transferring to a more traditional college to finish out their bachelor’s degree.

Compare Financial Aid Offers:  It can be beneficial to attend the school that offers the most in financial aid. 

Financial Aid: Applying for as much aid as possible will reduce the potential for student loans, or lower the amount of debt taken on. Financial aid comes in the form of scholarships, grants, work studies, federal loans, etc. 

Gift Aid

Gift aid is certainly the best way to pay for college because it’s free and doesn’t have to be paid back! It comes in the form of merit-scholarships, need-based scholarships, and grants.

Federal Aid

Believe it or not, the federal government is one of the biggest sources for financial aid. They have many programs set up to help students and their families pay for college. By filing the FAFSA, students and their families can become eligible for federal aid like work study programs and federal loans. 

Student Loans

Even with college savings and scholarships, many families turn to student loans to cover the rest of the costs. It’s key to know your options when it comes to student loans, as the choices have far-reaching financial impact. 

Federal: Federal loans should ideally be your first choice of loan, as they tend to have lower interest rates, more flexible repayment plans, and the option for student loan forgiveness. 

Private: There are numerous student loan lenders available, each with their own offerings, pros/cons, and eligibility requirements. Make sure you shop around to find an option that works best for you and your student.

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Saving Money for College

Though saving for college can feel like a monumental, and sometimes intimidating, task, it is possible to manage it all. Do your research, make a plan, and stick to it. All the effort is well worth it, after all, since it’s an investment in education for your child.