Higher Education Cost Planning
It’s no secret that the cost of advanced education can be very steep. Outside of buying a home and saving for retirement, probably no single expense hits families harder. A considerable amount of planning for your child’s future education is very crucial.
However, numerous tax breaks and university savings vehicles have emerged in recent years to help make university more affordable for more families. However, the mushrooming number of options — some of which conflict with each other — make the task of deciding which strategies to pursue a frustrating challenge.
Why save for university;
Before tackling the task of funding university for your children, first make sure it’s worth the money and the effort. Not everyone wants, needs or is qualified to go to university. Some will do fine in a trade school, perhaps join the military or pursue other career avenues. Still, university does, on average, provide significant financial advantages. In addition to the direct educational benefits, a university graduate earns an annual average of over 62 percent more than a high school graduate, according to recent statistics.
University versus retirement;
Many professionals believe that parents shouldn’t sacrifice their efforts to save for retirement on the altar of university. Your children will find a way through university, even if your help is limited. Parents who fail to save enough for retirement risk poverty and reliance on Social Security as a sole means of income. So, the first step when calculating how much you can save for university is to be sure you’re already saving enough for retirement. Some trade-off may be acceptable, such as delaying retirement two or three years. Just be sure to weigh the costs and benefits in a rational, non-emotional, manner as you make decisions. Let your children know what you can realistically afford. They may have to choose a less expensive school, fund more of it themselves or borrow more heavily. In general, it’s a good idea to have your children earn at least some of their own university money, even if you can afford to pay the entire bill. It increases their feeling of ownership, and hopefully, their commitment.
Start saving now
Some families assume they shouldn’t save for university because they think it will reduce financial aid. Not a good idea, say planners. First, the vast majority of financial aid these days is in the form of loans, which you and your student must pay back. Thus, it’s better from a financial standpoint to save money and earn a return on it rather than borrow that money and pay interest on it later. Saving also gives you more flexibility.
You are less likely to be forced to pick a second-choice school because it has a better financial aid package than your first choice. Future financial aid may be tighter or unavailable, or current tax breaks may have disappeared. Carefully saved or invested money will be there regardless. As with any form of investing, time is your ally. The sooner you start to save, the better off you are. Consider cash gifts for your newborn as a great way to jump-start their university fund. If you start early, the power of “compounding” is on your side.
How much do I need to save each month?
As with saving for any goal, you’ll need to determine the cost of university, how much time you have to save and what kind of realistic return you can earn on the money you save. Keep in mind, the cost is not just for tuition. Figure in room and board, transportation, books and supplies, and miscellaneous expenses.
How should I save?
That, too, depends on your individual circumstances. Time is a big factor, as well as your willingness to take some risk. If your child is entering high school, you’ll probably want to become more conservative with your investment strategy by reducing exposure to the stock market and mixing certificates of deposit, money market funds or short-term bonds into your portfolio. Returns will be lower, but you don’t have the time to weather an investment setback. With a younger child, you might feel comfortable taking more risk, such as investing in stocks or stock mutual funds.
What are my investment choices?
The challenge today is that there are so many options for saving, and one size does not fit all. Some of the vehicles to implement your university planning strategy include:
Taxable investments:- You can invest in anything you choose; stocks, mutual funds, bonds, real estate — with the potential of earning a higher return than some other university investment options. Income from the assets is taxed at your rate. You can minimize any capital-gains taxes on the investments by gifting the property to your child when it’s time for university and having your child sell the property (though you could face gift taxes). IRAs. You can choose your investments. Earnings grow tax deferred, and early withdrawals are not subject to penalties if used for qualified university expenses. Earnings are subject to income tax, however.