How to Save for College

How to Save for College

These days, college costs a pretty penny. From 2003-2004 to 2013-2014, the average cost of college rose by 34 percent, according to the National Center for Education Statistics. During the 2013-2014 school year, the average cost of college was $15,640 at a public institution and $40,614 the nonprofit, private school. If you don't have between $62,000 and $122,000 just lying around, don't worry. There are a number of ways to save for college that will help you cover the costs and avoid taking out a lot of loans.

Is College Even Worth It?
When you look at the high sticker price of a college education, you might wonder if getting a four-year degree is even worth the time, effort and cost anymore. According to a study conducted by Gallup and Purdue University, about 50 percent of alumni from public and private, non-profit schools stated that their degree and education were worth the cost.

Going to college and graduating from a four-year program has a positive effect on a person's earning potential, too. The median weekly income of a person with a high school diploma was $638 in 2015, according to data from the Bureau of Labor Statistics. In contrast, the median weekly income of a person with a bachelors degree was $1,137. According to the BLS, people with college educations are also less likely to be unemployed than those with a high school diploma.

When to Get Started
Timing is everything when it comes to saving for college. The sooner you start to save for college for your children or yourself, the more time your money will have to grow and the more you'll be able to put away. Even if your child is still a toddler and you have no idea whether he or she will want to go to school, it can be helpful to start setting money aside.

One question people often find themselves asking is whether to save for retirement first or save for college. If you can't afford to save for both, it's usually recommended that you focus on retirement savings first, especially if you can get a match from your employer. There is a lot more flexibility when it comes to finding ways to cover college costs, from using loans to attending a less expensive public school or community college, than there is in coming up with ways to cover the cost of retiring.

Keep in mind that that money in your retirement account should be earmarked for retirement, only. If you withdraw it early to cover school costs or borrow from it to pay tuition, you can end up paying large fees and tax penalties.

How Much You'll Need
Do not worry about trying to cover the entire cost of your child's college education. This can be a big relief since the cost of four years of school is expected to be more than $100,000 for a public school and well over $200,000 for a private school, as an article in Money noted. Instead, you can aim to save about a third of the cost of schooling for your child. You can make up the remaining two-thirds of the cost with a combination of financial aid and money contributed from your income during each year your child is in school. Of course, if you have the cash and desire, you are welcome to set aside the full cost of your child's education and avoid any loans or other sources of aid when the time comes.

Where to Put the Money
Where should you put the money you are setting aside for college? You can deposit it in a basic savings account, but doing so won't allow it to grow much over time, especially if interest rates remain pretty low.

A better option might be to choose a program specially designed for saving for college, such as a Coverdell Education Savings Account or a 529 plan. If you open a Coverdell, you can contribute up to $2,000 per year, per child, until the child turns age 18. Any amount the account earns isn't taxed, as long as it is used to pay for school before the beneficiary turns 30. If the money in the account isn't used to pay for school, it ends up belonging to the child named on the account.

A 529 plan has some similarities to the Coverdell, namely that earnings aren't taxed, as long as they pay for school. There is no contribution limit for a 529 plan. While a Coverdell ESA has income limits, families are able to contribute to a 529 no matter how much they earn.

Which option is the best choice for you depends on your income, age of your children and a number of other factors. To learn more about how to save for college and how to get the most out of the options available, contact Coosa Valley Credit Union today.