Did you know that September is "College Savings Month"? Sending your student to college is an act that is likely to cost you a decent amount of money. Funding it is something that all parents have to think about it and the sooner the better. If it sounds overwhelming, confusing, and maybe a bit stressful, rest assured you are not alone. I called on a professional - USAA Certified Financial Planner, Scott Halliwell - to answer a few of my questions and hopefully the answers will help you too.
Tara: Scott, why is it important to save for college?
Scott: First let's discuss why it's important to get a college degree in the first place. I am constantly amazed at how often people say they don't think it is. We recently did a Facebook post that included a video on college funding. Some of those who commented said they either didn't think college was important for their children or they expected the children to pay for it on their own. I'd be willing to bet those parents haven't seen the most recent Employment Situation Summary on the Bureau of Labor Statistics website. The data in this table shows that 7.8% of those ages 25 and older are currently unemployed. However, only 4.3% of those with Bachelor's degree or higher were unemployed. Compare that to 9.3% unemployment for those ages 25 and older with only high school diplomas and the importance of college becomes a lot clearer - a college education comes in pretty handy for getting a job.
Now let's look at why it's important to save money to pay for college - because it's expensive! Using USAA's education savings calculator, I recently calculated the future education costs for a newborn. Assuming costs rise each year by 5.75% (historical average), a college costing $15,000 per year today ($60,000 in total) will cost just over $164,000 by the time that child turns 18.
I realize there are ways to pay for college other than simply accumulating a large enough sum of cash but the point here is that some level of saving is probably a pretty good idea.
Tara: When should I start?
Scott: I'd go with pre-birth! Just kidding...but I would certainly start sooner than later. Let's go back to my previous example to illustrate why this is important. To accumulate enough to pay for the education I outlined, one needs to save $342 per month, every month; from birth until the child turns age 18 (assuming a hypothetical 8% annual return on your savings). However, if one waits until the child turns 5 years before they get started, the monthly savings need increases to $450. The longer you wait, the higher the payment.
Tara: Where do I find additional funds in my budget?
Scott: Whatever you do, don't take it from your retirement savings. When it comes to retirement vs. college funding, remember this. If, in an attempt to better your child's life by paying for college for them you sacrifice your retirement, someday you are likely to run out of money or be unable to take care of yourself financially. Should that turn out to be the case, who do you think is the likely party to take care of you?
As for where to get the money other than robbing your retirement savings, I think it starts with setting a target monthly savings amount. Then analyze all of your expenses and find places to consciously cut back and redirect those dollars to college funding.
Tara: What if I have multiple children?
Scott: Generally speaking, I like to see parents have separate accounts for each child rather than pooling it together into one. This way, you have less risk of spending everything you've saved on the oldest child and leaving the other(s) with nothing.
Tara: Any advice on what vehicle to use for educational saving?
Scott: Two of the most popular are Coverdell Education Savings Accounts (ESAs) and 529 College Savings plans (529s) because both allow for tax-deferred growth and tax-free withdrawals if used for qualified expenses.
Tara: Are there any programs/resources out there that will help me with educational costs?
Scott: There are many possible programs to help out with college costs - potential financial aid, student loans, or military benefits like the GI bill. In addition, one of the ways USAA is helping members save for college is through the USAA Distinguished Valor Matching Grant by matching contributions to a USAA 529 College Savings Plan dollar for dollar up to $1,500.
As of right now, the criteria to qualify are fairly narrow but they should still benefit some. See if you are eligible by visiting www.usaa.com/matchinggrant.
Consider the investment objectives, risks, charges and expenses of the USAA College Savings Plan (Plan) carefully before investing. Call 1-800-292-8825 to request a Plan Description and Participation Agreement containing this and other information about the Plan from USAA Investment Management Company, Underwriter and Distributor. Read it carefully before investing. If you or the beneficiary are not residents of the State of Nevada, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through this Plan. Please consult your tax adviser.
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