According to a recent NerdWallet survey, 1 in 5 parents want to save for their child’s college but haven’t started. Another report from the Education Data Initiative states that 36 percent of parents are neither planning nor saving for their kids’ college. These statistics are concerning, especially as the cost of a college education in the United States continues to rise.
If you fall into this category, fear not! Now is a great time to get started saving for your kids’ college, and we’re here to help. In this blog post, we’ll cover why saving for your child’s college education now can make their future less stressful, what steps you can take to start saving, and some tips to get the most out of your savings plan.
Let’s get started!
The Impact of Student Loan Debt on Young Borrowers
Student loan debt can have a profound and lasting impact on young borrowers, making it increasingly imperative that parents start saving for their children's college education as early as possible. According to recent data, the average borrower owes $28,950 in student loans. This financial strain often forces young adults to delay major life milestones such as buying a home, starting a family, or saving for retirement.
Furthermore, the psychological stress of carrying this level of debt can negatively affect mental health. One recent study following a group of college graduates found links between high debt levels and things like problematic drinking, anxiety, and depression.
The increasing financial burden of rising education costs coupled with the impact that debt can have on a borrower’s well-being and future financial stability emphasizes the urgency for parents to begin saving early for their children's higher education to help alleviate this crisis.
How to Start Saving for Your Kids’ College
From choosing the right savings account to figuring out exactly how much money you should be putting away, making a savings plan for your kids’ education can seem complicated. But it doesn’t have to be! Here are a few helpful, straightforward tips to get you started on the right track.
Set Clear Goals and Budget Accordingly
Begin by establishing specific savings goals for your child's education. Determine how much you aim to save by the time they enroll in college, taking into account factors like tuition costs, the type of institution, and potential financial aid. Create a budget that allocates a portion of your monthly income towards this goal. Consider using a dedicated savings account or 529 plan to segregate these funds and prevent them from being used for other purposes.
Explore Tax-Advantaged Accounts
Investigate tax-advantaged college savings options like 529 plans. These accounts offer tax benefits and investment growth potential. 529 plans are popular for their flexibility and state-specific benefits. Contributions to a 529 plan grow tax-free, and when used for qualified educational expenses, withdrawals are also tax-free. Additionally, many states offer tax deductions or credits for contributions to their specific 529 plans, providing an extra financial incentive.
There are also some big changes coming to 529 plans over the next few years. In December 2022, SECURE Act 2.0 was signed into law, permitting individuals holding a 529 plan to transfer any remaining funds within the account directly into the plan beneficiary's Roth IRA. This way, if your child receives a scholarship or chooses a less-expensive educational path, the funds you saved can still be used for their future, but in the form of retirement savings.
Depending on your child's age and the time horizon until they start college, consider an investment strategy that balances risk and potential returns. Generally, you can afford to take on more risk when your child is young and gradually shift towards a more conservative approach as they approach college age. Diversify your investments to spread risk and seek advice from a financial advisor if needed to make informed investment decisions.
Regularly Review and Adjust Your Plan
College costs and your financial situation can change over time. It's essential to periodically review and adjust your savings plan. Assess whether you're on track to meet your savings goals and make necessary adjustments to your contributions or investment strategy. Additionally, consider working with a financial advisor to help you stay informed of changes in tax laws or college savings plans that might affect your savings strategy. Being flexible and adaptive in your approach will help ensure you stay on course to meet your financial objectives.
Build a Solid College Savings Plan with Encompass
If you’ve made it through this post and you’re motivated to start saving for your child’s college education, don’t lose that momentum! Reach out to an Encompass advisor today. Wherever you are in the process, we’d love to talk with you about how we can work together to set your child up for success in college and beyond.