With many of us still paying off our student loans, the burden of paying for education is both stressful and easy to ignore.
It is essential we review the facts and realize the tuition prices for our children will be far higher than our own.
If you think our parents complained about paying for college, imagine spending at least three times more than they did on your own child’s tuition.
With careful planning, this can be accomplished.
There are huge benefits to saving early for your kid’s college tuition. There are many tax-efficient ways to invest and grow this tuition as well.
We need to arm ourselves with the right tools to be able to give our children higher education.
Here are nine things you need to know about saving money for your child's higher education:
1. Tuition increases by 8 percent per year.
The US economy currently has 0 percent inflation. This means our money maintains its value, while college gets more expensive every year.
Eight percent of inflation per year means education will be more than three times the price when our kids go to college.
2. In 10 years, one year of tuition will be $90,000.
According to the College Board, the average cost of tuition and fees for the 2014 to 2015 school year was $31,231 for private colleges.
The center for financial aid has calculated that this figure will be approximately $90,000 by 2025, which is just 10 years from now.
That’s almost $360,000 for a four-year education.
3. Start saving from birth.
This will help the money grow bigger and at a faster pace. It will ease the burden of having to pay huge sums of money at once.
It will also make the process of saving a lot easier.
Putting away $10,000 a year is far easier than putting away $300,000 when your child is 17.
4. Set up a 529 college savings plan.
Whether you're rich or poor, a 529 plan will ease some of the burden of tuition.
A 529 plan is a tax-advantaged way to save for your child’s tuition.
Tax-advantaged does not mean you do not have to pay taxes.
The money you contribute to a 529 plan is after-tax money, but as the account is invested in the market and grows, the gains are exempted from capital gains taxes.
It allows you to invest after-tax money into an investment account, and the growth in that account is tax-free.
State tax laws vary, so you should consult with your tax advisor.
5. Anyone can contribute to a 529 plan.
You can set one up and put baby shower gifts, birthday presents or even gifts from grandma in there.
6. A 529 plan can be used for any type of secondary education.
You can use it for college, graduate school, law school, medical school or any other type of higher education from an accredited university.
7. You can change the beneficiary at any time.
As long as the money is being used for higher education, textbooks or room and board, you can change the beneficiary at any time.
If one of your children decides not to go to college, you can give the savings to another one of your kids, a niece, a nephew or even a friend.
8. There is no minimum investment.
Do what you can, when you can.
You can contribute to the plan at any time, with no minimum contribution.
There is a maximum contribution due to gift taxes, which is usually $14,000 per year per parent.
9. A rule of thumb is to put away $10,000 a year for each child's education.
Of course, this number varies depending on how much you make, how much time you have and the performance of your investments.
But it is a good base to go by.
Overall, setting up a 529 plan for your child is an easy, hassle-free way to save for college and to save on taxes.
529 plans are easy to set up with your financial advisor, or can also be set up online through various websites.
I encourage you to make this a priority.
The best thing we can buy our children is an education.