In life, there are a few large expenditures that you can almost always count on. If you have children, college usually tops the list. While it can be tough to watch your child grow into a young adult, it helps to be financially equipped for his or her future. How much you should be putting away for college can depend on many factors like the type of school you are saving for, and how much you can afford to save. When you use this calculator, you can see how your college savings will pan out. Or, if you're just getting started, you can use this calculator to test out various savings strategies
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What is this calculator for?
This calculator is designed to help parents plan for their children’s higher education costs. It allows you to add the deposits you’re comfortable making, to gain an understanding of how much you can afford to put away.
The calculator also factors in inflation so you can get real insight on how much college will cost. The amount you pay for college now will be much less than if your child enrols in ten or fifteen years. As such, this tool gives you a great way to work through your budget. From your results, you should get a sense of your financial position for when your child is ready to begin college.
If you continue reading, the suggestions on this page can introduce you to the basics of saving for college. However, there are many complexities in paying for college that are not discussed here. We recommend that you consult with an advisor that is skilled in tax law and financial planning to help create a perfect a college saving strategy.
How much does college cost?
It can be difficult to predict the exact cost of a college or university education. Things like the type of school, whether public or private can dictate how much you might spend on a college enrolment. You’ll also have to consider the type of program and the amount of schooling that’s required. If your child opts for a two-year diploma, it will be less expensive than a full-length doctoral program. If the campus is far, or out-of-state, you’ll have to budget for additional living and transportation expenses.
Beyond that, there is inflation to account for. Not only is the cost of education a moving target, the dollar is also in a state of flux. According to a recent study published by Edvisors.com, inflation tends to be more pronounced in education than other prices in the economy. Ultimately, this means you may have to save more than you first bargained for.
Below, you can find a graph comparing the costs of higher education now, and after the effects of inflation in 17 years.
*The prices used in the above chart are sourced from The CollegeBoard, Trends in college pricing 2017, and presumed to increase 5% each year.
Current data shows that tuition prices can rise by 4%-9% per year. However, the expenses in the chart include living costs, books and supplies, transportation, and misc. expenses. Thus, the net increase of inflation is lower than that which applies to tuition alone.
Finally, it's important to note that these are yearly averages and should to be adjusted to model the complete cost of schooling. For example, a private 4-year on campus education could actually cost $490,000 or more in 17 years.
What’s the best way to save for college?
Fortunately, saving for post-secondary education has never been easier. American families have many investments and savings programs designed to help them budget for higher education costs.
By putting your money into a savings program, you’ll enjoy special tax treatments and an assortment of investments to help grow your capital. Here’s a rundown of the most effective college saving strategies.
A 529 college savings plan is a versatile savings account that is meant to help you save for future education costs. Authorized by the IRS, these plans are sponsored by state governments and educational institutions. If you opt for this plan, you can deposit up to $15,000 per year, as of 2018. As long as the savings are put towards qualified education expenses, you won't pay taxes on your earnings. Recently, These plans changed to allow families to withdraw up to 10k a year for k-12 private schooling as well. To learn more about 529 savings plans, read the publication by the Securities and Exchange Commission here.
A Coverdell education savings account (ESA) is another flexible way to save for education expenses, similar to a 529 plan. With a Coverdell ESA, you can save up to $2,000 per year, and use your earnings tax-free for qualified education costs. Unfortunately, phase-outs begin at 95k to 110k (or 190k to 220k for married couples filing jointly). If you do opt for this plan, you'll also be able to use your funds for elementary and secondary school expenses. To read more about the program.
A Roth IRA can also be a useful tool to help with college costs too. You'll experience tax-free growth for deposits up to $5,500 (or $6,500 if you're over age 50) each year. These accounts are fairly flexible when it comes to making withdrawals and allow you to use your earnings without penalty for qualified education costs. If you have a traditional IRA, you can still access your money penalty free, but you will have to pay federal and state income taxes on your withdrawals. However, advisors recommend prioritizing your retirement savings before your child's college fund.
Though all the above methods are effective strategies for building up a college fund, most families need some help to pay for college. In the next section, we're going to continue the discussion on how to supplement your saving with the right financial product.
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What if you haven’t saved enough?
Ifyou haven't saved enough, don't worry – this is very common, and there are many options available to you. Most families will complement their savings with federal grants, personal loans, or academic scholarships. Follow along below for a quick synopsis of some different methods to cover the costs of college.
A go-to option for many families that need financial assistance is the Federal Student Aid program (FAFSA). Federal and State governments, educational institutions, and private organizations can provide grants to students under this program. If your child receives a grant, you won't have to the money back. The aid is typically awarded based on a family's financial situation (needs basis), or according to the child's athletic or scholastic abilities (merit basis). There are also other financing solutions under FAFSA such as work/study plans and student loans.
A 401k loan can be an alternative for those that participate in the program and need some help paying for college. When you borrow money from your 401k, you'll have to pay back the loan (with interest) within five years – so it's best not to borrow too much. The interest payments go back into your account to mimic your investment returns, so there is a neutral effect on your retirement savings. If you do this, your progress will stall on your retirement plan, and there are some fees to administer the loan. Still, you'll avoid early withdrawal penalties and income taxes on the money. Plus, you're paying interest to yourself.
The bank can also provide some flexible alternatives to top up your savings for college expenses. Depending on the cost of the tuition and your credit history, your child may qualify for a student loan. For homeowners, other possibilities include a home equity takeout, where you borrow up to 80% of your home's market value minus what you currently owe.
Finally, students can receive full or partial scholarships based on their performance. Like grants, scholarships don't have to be paid back. However, it can be very competitive to receive a scholarship.
Are there any tax breaks for higher education?
Yes! The government allows taxpayers to claim certain deductions each fiscal year.
When you take out a student loan, interestpayments can be deducted from your taxes. Taxpayers can get a dollar for dollar credit on up to $2,500 of interest paid on student loans. Unfortunately, this credit gets phased-out for single filers making $80,000 or more (and $165,000 for those that are married and filing jointly).
There aretax credits that taxpayers can claim to minimize the cost of college too.
One credit available credit is the Lifetime Learning Credit (LTLC). The LTLC allows you to deduct 20% of up to $10,000 in tuition and fees. The student doesn't have to be studying for a degree, and there is no limit on how many consecutive years you can claim this credit.
Alternatively, taxpayers can claim the American Opportunity Tax Credit (AOTC). This tax break allows you to claim 100% of the first $2,000 and 25% of the next $2,000 from your child's college tuition. However, it cannot be claimed in more than four tax years for one student. There are both enrolment and attendance requirements of the student to be eligible for this credit. Taxpayers can choose between the LTLC and AOTC, but cannot opt for both in the same filing.