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Last week marked the 11th America Saves Week where over 1,500 organizations promote good savings behavior. The ultimate goal of America Saves Week is to educate consumers on how to save money, reduce debt, and build wealth through good money habits and providing practical money management practices that can be utilized every day.
This is the second year American Student Assistance has participated in this week-long initiative. Our interest in America Saves Week stems from our commitment to teach those of all ages how to reach their post-secondary education goals in a financially responsible manner.
Saving for a post-secondary education can feel daunting, especially with the average cost of college estimated to be anywhere from $41,228 to $92,869 by 2030. Yet, many are so unprepared to pay for college when it comes that we must do more to encourage early savings for education. Experts recommend starting the savings process as early as possible—as soon as birth—to be best prepared. It may sound outlandish to start worrying about college while you have so much else to worry about with young kids but saving early in a child’s life allows the most time for the savings to grow. The power of compound interest shouldn’t be underestimated. All the interest your savings accrues earns interest on itself and compounds – even small amounts of money will see noticeable growth over 18 years.
Some wonder if it’s worth saving if there is little chance they could save enough to completely cover the cost of a post-secondary education, especially since they don’t know what to realistically expect the cost of a post-high school education to be or what type of education their kids will want to pursue. But has anyone ever complained about having a surplus of savings?
In our opinion, no amount is too small. It is unlikely that college costs will decrease in the foreseeable future. Every dollar you can save is a dollar you (or your kids) won’t have to borrow to go to whatever type of school they are interested in after high school. Even ten dollars per month for the 18 years leading up to the end of high school would give a kid a minimum of $2,400 (without counting interest) that can be used for tuition, supplies, or living costs that they would otherwise need to borrow. It’s also important to keep in mind that if the $2,400 was borrowed in a student loan, it would cost you $584 more once interest payments are included over 10 years.
There is a concern from some families that the more they save, the more the money will be “used against you” when calculating financial aid. The majority of financial aid is in the form of loans, so do you want to pay more in cash up front, or more in loans later?
How to save for education expenses doesn’t have to be agonized over, either. While we don’t recommend the “under-the-mattress” savings method, your typical savings account at your local bank or credit union can do the trick. Or, a 529 college investment account can be an excellent tool for making the most of college savings.
529 plans are investment accounts that can be used by families for college costs. These plans are operated by states but may be managed by private financial institutions. Your savings in 529 plans grow tax-free and can be withdrawn tax-free if the funds are used for qualified educational expenses like tuition, fees, and books. Many states offer tax incentives like credits and deductions for their residents if they contribute to their state’s 529 plan. Some states will provide these tax incentives if their residents save with any 529 plan, but that is less common.
Once a kid is at the post-secondary doorstep, the savings in a 529 plan won’t negatively affect their financial aid as much as other savings accounts in their names and, in some states, offer protections against negative market swings. The risk of these plans is also mitigated by your ability to transfer the savings to another dependent if one of the kids in a family doesn’t pursue a post-secondary education. So, it’s no wonder there are over 13.2 million 529 accounts currently open and $306 billion saved using these plans. (Despite these numbers, though, 529s are still relatively unknown, so we’re trying to spread the word!)
No matter how much you save, there will be times when a student’s educational aspirations outpace her family’s ability to pay, even after exhausting savings and student loan eligibility. Saving six figures to go to a private four-year college may not be possible for every family. It is important to remember that there are many options when it comes to a post-secondary education. The right financial fit may be a public university, community college, career school, or combination of all of them, and there are tools and resources that you can use to help you figure out what your best options are based on your child’s interests, education expectations, and career aspirations: