How to Start Saving for Your Kids' College Expenses
Saving for your kids' college education is a top priority for many parents. But with bills to pay and other nearer-term expenses to consider, it's easy to find you haven't saved enough once it's time for your kids to to start their higher education. The key is to have a plan that you can stick to for years—a little saving can go a long way over time.
There's no one answer to what this plan should be or exactly how much you should save for your kid's college expenses. However, there are some important financial moves you can make now to help with saving for those future costs.
Grow college savings with a 529 account
A 529 plan is a tax-advantaged way to invest money for your child's future college expenses. Generally, the parent owns the account, with the child named as the beneficiary.
Although you fund the account with money you've already paid taxes on, 529 funds grow tax-free. Any money distributed for qualified educational expenses is also considered tax-free. Qualified expenses include tuition, books and necessary equipment, as well as room and board if the student is enrolled at least half-time.
The money set aside in the 529 account has a relatively small effect on your child's ability to qualify for financial aid. That's because any 529 funds held by a parent or dependent child are listed as a parental asset on the Free Application for Federal Student Aid, or FAFSA, form. Parental assets above $20,000 only reduce an aid package by a maximum of 5.64% of the asset's value. So if you save $21,000 in a 529 account, it will only reduce your child's student aid offer by a maximum of $56.40.
Finding the funds
One of the areas you may struggle with is finding places in your budget where you can cut back so you can put that money toward your kids' college savings. There are a number of strategies you can use to start funding a 529 account and moving toward this important savings goal.
- Ask friends and family to help with contributions. For birthdays, holidays and other occasions, let your loved ones know that a financial contribution to your child's 529 account would be a meaningful and long-lasting gift.
- Contribute your childcare expenses. As your children age, you'll have fewer childcare expenses. Instead of absorbing the cost of daycare into your budget, you could instead put that same amount toward your kids' 529 account.
- Have your children contribute a portion of their allowance or income. Asking your children to put some of their own money aside for their future education is an excellent way to help them take ownership of their future education. It can also help them form good financial habits early on by practicing saving their money.
The important thing is to make consistent savings a habit, no matter how little you can start with per month. Setting up a monthly automatic transfer of money to your college savings account will help ensure that you're consistently building the account.
Slowly increase your savings
Once you establish a college savings habit, you can increase your contributions over time. Parents might increase the automatic transfer amount by 1% every 6 months. This will minimize how much you feel the difference in your budget, while still making an appreciable change in how much you put aside.
Paying for higher education doesn't have to be overwhelming. Taking advantage of a 529 account and adjusting your savings habits can ensure that your child is ready for college when the time comes.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.