Most parents want their kids to not get stuck with a mountain of student loan debt. Learn the best ways to save now for your kid's college or trade school!
How to Save for Your Kid's College / Trade School Education
With student loans seeming like a weight on many college grads, I think most parents who kids are thinking about either college, trade school, or vocational schools are trying to find ways to ease the burden by saving ahead.
And the advice typically given is to save ahead.
How do you do that when you juggling your current family expenses and saving up for other goals?
To help me out today is Drew Snider. He’s a director in Financial Planning at Coastal Wealth Management.
He’s also a parent of a 12-year-old daughter and yes, he’s been thinking about this as well. So he’s looking at this from both sides.
In this episode, we’ll get into:
- The rising costs of college and why its harder for kids to work through college
- What options you have to save to and invest
- How you can start saving now
Let’s get started!
Resources to Start Saving and Paying for College
If you want to save something for your kid's education, here are some handy resources to get you started!
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- Grow Your Stash Faster: High Yield Savings with CiT Bank
- Automatic Saving: Qapital
- Jumpstart Your Marriage and Your Money
- Why College Is So Expensive In America
- How to Find, Save, and Make Money for Your Kid’s College Fund
- College Is Expensive. What's Your Plan?
- How to Talk to Kids About College Costs
- 529 Account – Your Kid’s Ticket to Student Debt Freedom – with Abby Chao
- How To Pay For Your Kids’ College And Still Have Enough Money To Retire
Thank You to Our Sponsor Coastal!
Support for this podcast comes from Coastal Credit Union! If you’re living in the Raleigh Durham area and looking to bank better, come check out Coastal today!
Cost of College is Rising Fast
Elle Martinez: When my husband and I went to college, we received a combination of scholarships and financial aid, but they didn't cover everything. So we took on some student loan and both my husband and I worked through college.
Going to school full-time and working part-time was a bit of a challenge with time management. But it wasn't impossible.
And actually, looking back, we both appreciate it. It made us be more disciplined with our time and also our priorities.
Now, it's almost given that college keeps getting more expensive. But you may not be aware of how expensive it can be at some colleges.
Drew Snider: We're hearing a lot of parents, especially, I would say parents in their 40s and 50s over the past 10 years or so who claim that they didn't need to save for their kid's college because they paid for their own way through. And what I don't think people who have that mindset have realized is that the cost of college has gone up so much more than what a kid can earn to pay his or her way through college that it's almost impossible to do that anymore.
Just as an example, I went ahead and looked up some information on UNC-Chapel Hill, and I found that from 1986 to 2016, the cost of tuition went up eight-point one five percent. And the minimum wage, which is what someone could expect to earn if they're a college student, only went up two point six percent.
Well, so what that means is if you're working in 1986 you could have worked 34 hours a week and paid tuition and room and board and pay for college and your ex and your you know, your food and housing.
In 2016, in order to pay for tuition and your room and board, you would have to work 52 hours a week!
Finding Ways to Make College More Affordable
Elle Martinez: Okay. Working 52 hours a week isn't good for anybody, especially if you're going to be studying full time for a trade or getting a college degree. But I do think that this brings up a good point. Do you know the cost of going to college right now with the good schools or solid schools in your area?
You can run a what-if scenario. What if they don't have scholarship or financial aid money to cover the costs? How much would they have to work if they wanted to graduate debt-free or close to debt-free?
If you claim that the number is enormous, then there are several options that you can look at.
One being maybe switching schools or directing their attention to a school that is affordable and that can help them still get whatever training or degree that they're looking for. Just being aware of the costs can have a tremendous impact.
You can begin having these conversations with your kids that way. They understand what options they have ahead of them and can prepare accordingly. Remember, we want them to not only get the training that they're gonna get at trade school or in college, but we also want to make them financially savvy.
Paying for College
Elle Martinez: Speaking of finances, there's another concern that Drew has with how parents are planning to pay for college.
Drew Snider: On the other side of that is a lot of parents choose to borrow money for college or a lot of people take 401(k) loans or home equity loans to pay for college and not save for college.
And so the other calculation I did, I wanted to find out what would it cost you out-of-pocket cost if you started saving for 10 years. Vs. waiting. And then just borrowing money?
The numbers that I came up with. And this is just saving for twenty-five thousand dollars, so one year of college, if you saved one hundred and fifty-two dollars a month for ten years and got a 6 percent rate of return.
You would have twenty-five thousand dollars at the end of that ten-year period. You're out of pocket. What you actually invested was eighteen thousand two hundred forty dollars.
OK, now let's wait and take this other couple who decides they don't want to save. They're gonna go to Disney World instead. And then it's time for their child to go to college. It's twenty-five thousand dollars.
So they're gonna borrow that and they're gonna pay it back over 10 years and pay 6 percent interest.
Their out-of-pocket cost is thirty-three thousand three hundred sixty dollars. So basically it costs someone about fifteen thousand dollars more to wait and borrow to pay for it.
Where Should We Invest for Our Kid's College Fund?
Elle Martinez: So you might be listening to this and thinking, OK, we need to start saving for college. But what's the best option for us? Drew says that there are three key things to consider to make sure you're getting the best option for you and your family.
Drew Snider: When you think about where you're going to say if your kid's college, you kind of have three things in mind. One is what are the tax issues or benefits of different accounts? The second is, who's the owner? Who's the owner of that account? Is it the child or the parent? And the third thing you want to consider is the investment choices that you're going to have within that account.
Elle Martinez: In the two popular options for parents, we're saving for college 529 plans in Coverdell Education Savings Accounts (ESA).
529 Plans and ESAs
Drew Snider: When you look at the 529 plan and the Coverdell Education Savings Account, they both have great tax advantages. You can invest in investments within those accounts. They grow tax deferred. And then when you take them out for college expenses, they come out tax-free.
So all the earnings that you've made over the years, you don't ever pay taxes on those. If they're used for qualified college expenses. So there are some very nice benefits there. Yeah.
The IRS doesn't give away things for free, though. The catch is if you don't use it for college expenses, then there is a 10 percent penalty on withdrawals from the account and are not used for that purpose.
Elle Martinez: And they're both solid plans that you can use to save for your kid's college education fund. There are some big differences. You need to know about.
Compare Different States' 529 Plan
Drew Snider: The truth is most people are saving to the 529 plan. And part of the reason for that is there's virtually no limit on how much you can invest in there and how much you can contribute.
The truth is there are some limits and you should talk to your financial advisor about that. But they're limited by the gift tax rules, which is pretty high. So you can put a lot of money in the Coverdell account is capped at two thousand dollars per year for contributions. So that alone, I think, keeps some people from doing it and are using the Coverdell account.
The other issue with the Coverdell account is your income has to fall within certain or under certain limits for you to be on that account. And that can keep you from doing it just for your information out there.
For a joint couple filing jointly. There is a phase-out range between one hundred and ninety and two hundred and twenty thousand dollars of income. And if you're single, it's ninety-five thousand to one hundred and ten thousand dollars of income.
So the point there is if you're over one hundred ninety as joint filers as a couple, then you're going to be phased out and potentially can't even contribute the two thousand.
Elle Martinez: If you decide to open and use a 529 account to save. There are some things you need to be aware of.
Drew Snider: 529 plans are established by state. Each state has their own plan and they choose who the investment company is that's going to run the investments within their plan.
As an individual deciding which plan to use, a couple of things you need to think about are one, do you get any tax advantages from using your state's plan here in North Carolina?
We used to have a tax advantage. We would get a tax deduction or a credit actually on our state taxes for contributions that ended met several years ago. So if you're a North Carolina resident, there really isn't an advantage from a tax standpoint to use the North Carolina plan.
Most states allow out-of-state residents to use their plans and so that really frees an individual up to pick which states plan they want to work with.
I think a lot of people choose based on the investment choices and who the investment manager is through. Coastal we have access to many different plans across the country.
I personally use the Virginia plan that uses American funds as the investment company. I like the flexibility of the investment choices. Performance has been good ease of service. They have a great online portal account. Add money to it. It's excellent.
But I've also used the North Carolina plan back when you got a tax credit for our contributions. They're mostly Vanguard funds, which I think a lot of listeners are probably familiar with, which are low cost.
I'll be honest with you, there aren't as many choices through the North Carolina plan. So. But it's up to the individual to do their research to find the plan. That's that's right for them.
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