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3 Types of College Savings Accounts
According to one recent report on college savings, the average cost of a college education in the United States is a whopping $35,331 per year. When you take into account student loan interest rates and the loss of time in the workforce, the price skyrockets even further.
When saving for college, most people think of 529 plans as the top/best option. As with most things in the financial realm, it depends. The top strategies I discuss with my people include 529 plans, Roth IRA’s, and cash value life insurance (CVLI).
One of the reasons we like the Roth IRA is that when applying for FAFSA, retirement accounts and life insurance do not count as assets, whereas any accounts in the name of the student, including 529 plans, do. Assets and income are both factored into your FAFSA results.
Here are three savings tools to help you build up your savings for college.
1. Cash Value Life Insurance (CVLI)
What is CVLI?
Cash Value Life Insurance (CVLI) is a form of life insurance that comes with an investment aspect that you can withdraw or borrow against. A CVLI is considered a tax-advantaged account because the growth within the policy can be accessed tax-free, as long as the policy is maintained.
As with other investments, the policy needs to be in place and funded over time in order to accumulate funds. Anything you put in a CVLI is post-tax, meaning it’s taxed upfront and you don’t have to pay taxes when you withdraw from it.
Do you have to use a CVLI to pay for college?
Unlike 529s, the money from CVLI can be used for anything you’d like. If the owner/insured passes away prior to utilizing the cash value to fund education, then the death benefit can cover such expenses.
What are the pros and cons of using CVLI for college?
There are no income or contribution limitations on CVLI, but there is one requirement: The insured must be insurable. For that reason, CVLI may not be available to everyone.
The investment options on CVLI can be limited, but are fairly inexpensive and akin to managed investment accounts.
2. 529 Plans
What is a 529?
A 529 plan is an investment account designed to be used specifically for education purposes, whether that be college, primary or secondary school tuition.
Like CVLI, 529 plans are tax-advantaged accounts, because they are funded with post-tax dollars and the money in them is allowed to grow tax-free. In other words, if you put in $10,000 and that grows to $15,000, you won’t have to pay taxes on the $5,000 growth as you would with normal investments.
Do you have to use a 529 for college?
While most people use 529s for higher education, the funds can also be used for primary or secondary school tuition as well as books, housing, computers, food and more – as long as those expenses are related to your education.
What are the pros and cons of a 529 plan?
529 plans vary from state to state in regards to contribution minimums and limits, as well as fees involved. Thankfully, you can choose any 529 plan offered in any state, not just the one offered in your state.
Again, contributions to a 529 plan are post-tax, and the money in them grows tax-free – but only if it’s used for education expenses. If you use money from a 529 for any other purpose, the earnings will be subject to income tax plus a 10% fee.
We can hear you asking, “But what if I save up all this money for college and then my kid gets a scholarship? What happens to the money then?”
Don’t worry. If a scholarship comes into play, you can withdraw up to the scholarship amount without any penalty. Same goes for if your child attends a U.S. military academy, becomes disabled or dies.
There are no income limitations, so 529 plans are available to everyone. As far as contribution limits, there technically aren’t any, but tax pros suggest staying within the annual gift tax exclusion, which is $15,000 in 2022.
There’s no way of knowing exactly how much you need when saving for college, but if you save too much, the leftovers can be transferred to an eligible relative to use for education.
One downside to keep in mind: The investment options available for 529s are limited and can be expensive.
3. Roth IRAs
What is a Roth IRA?
A Roth IRA is the most common type of account out of the three options we’re reviewing here.
Roths are tax-advantaged accounts. Contributions are post-tax and can be withdrawn without tax or penalty at any time. The earnings from your contributions can be withdrawn penalty-free – but not tax-free – for a few different reasons, including higher education expenses for you, your spouse, children, or grandchildren.
Do you have to use a Roth IRA for college?
No. You can make a penalty-free withdrawal from a Roth IRA for several reasons, including medical expenses, permanent disability, to buy a home or if you’re called to active duty, among others.
What are the pros and cons of using a Roth IRA for college?
The biggest difference between a Roth and the other two account types is that there are income and contribution limits. If you’re eligible, you can contribute up to $6,000 per year, as of 2022.
On the plus side, there are a plethora of investments options available.
So Which Type of Account Should You Use for College?
When saving for college, ask yourself three questions:
1. How much can you realistically save per year?
If you think it will be less than or equal to $6,000, a Roth IRA may be the way to go. Of course, you may be using your Roth for retirement, so consult with your advisor before going this route.
If you plan on saving more than $6,000 per year, you may want to consider CVLI or a 529.
2. Is there a chance you will need the money for something else?
If the answer is yes, go with the Roth or CVLI. As we’ll see later, 529s are designated specifically for education purposes and you could be hit with big penalties if you try to spend them on something else.
3. Is your household income within the IRS income limitations for Roth IRAs?
If your income is too high, consider the Roth option for your employer-sponsored retirement plan (e.g., Roth 401(k), etc.) and also consider CVLI and 529 plans.
Next up, it’s time to talk about everyone’s favorite subject: student loans (yay!).
You might think that since your college days are in the past, you no longer have to worry about the rising cost of education. But if you have young children or are thinking about starting a family sometime soon, the ol’ college talk could be coming back sooner than you think – and it’s probably worse than you remember.
As of 2021, the average debt tied to a bachelor’s degree at a public university was more than $28,000. Mind you, that’s not the total cost, just the amount that students couldn’t otherwise cover via scholarships, family help or other means.
At private colleges, that number jumps to nearly $40,000. The statistics also show that those loans are tough to shake, with the average borrower needing 20 years to totally pay off their student loan debt.
How much do parents usually contribute to their children’s college costs? According to at least one recent study, parents have recently passed the threshold of covering half of all costs related to tuition, room and board, textbooks, and other educational expenses.
Of course, you want to give your children the world – and that includes the education of their dreams. In order to reach that finish line, you’ll need an accurate estimate of what that sticker price could look like decades down the road.
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The Rising Cost of College
Remember when you entered college and couldn’t believe how expensive it was? Unfortunately, that’s nothing compared to how much it will be for your kids to attend.
While Covid-19 has thrown the entire world for a loop these past few years, prior research shows that college costs have been rising at about 5% per year. If your child enters college in 10 years, that would send the price of a 4-year degree at a public school to over $150,000 in total, compared to roughly $88,000 today (did your head explode a little there? Don’t worry – ours did too).
With that in mind, it’s a good idea to overestimate in these scenarios rather than underestimate. If you save more than your child needs, you’ll end up with a nice chunk of savings you can use to go visit them more often. If you don’t save enough, there’s not much you can do.
Saving for College: Public vs. Private vs. Community
One of the best ways to accurately nail down a goal number for your college savings account is to talk to your child about their goals as they grow older. There’s a big difference between the sticker price on a community college and a private school – so getting an idea for where their head is can help you narrow down your number.
At the lowest price tier, you’ll find in-state community colleges. These institutions normally offer two-year degrees, but it’s becoming increasingly common for community colleges to offer bachelor’s degrees. As of 2021, the price of a bachelor’s degree at an in-district community college came to just $7,460.
To estimate the cost your child can expect from a community college in the future, try an online college costs calculator.
The next tier in college pricing is public universities. For a four-year degree in today’s world, the average price sits at a cool $25,487.
Chances are there’s at least one public college near you, but for public schools located outside your state of residence, you can usually expect a rise in tuition fees.
In many cases, public universities offer the same majors and life experiences as a private college at about half the cost.
Lastly, a four-year degree from a private college or university comes in at the highest price. In 2022, the average cost of a bachelor’s degree from a private college is $53,217.
To come up with your golden savings number, talk to your child about which type of school most interests them. Then, use an online calculator to calculate your savings goal.
How to Save for Your Child’s Future Education
Whether your child is leaning more toward community college or a private college experience, chances are you’ll need to save up some big dough to avoid those dreaded student loans. Here are three college-savings tips you can use to get started:
1. Research Your Options
There are several tax-advantaged accounts you can use to save up for your child’s college education. The most common of these accounts is called a 529 plan. With a 529, any capital gains your investments incur can be used tax-free for education expenses.
2. Give it Time to Grow
One of the best tips we can give new or expecting parents is to begin saving early. If your child is 18 years away from entering college, that gives you 18 years to invest and grow your savings fund. The sooner you begin, the more opportunities you’ll likely have to grow those savings.
3. Shop Around for Financial Aid
If your child is closer to leaving the nest, it’s a good idea to shop around for the best financial aid package.
This is a great way to narrow down schools Little Timmy is interested in. For example, if School A has an overall higher price than School B, but it also offers a better financial aid package, School A might end up being the cheaper option.
There are many factors your family will need to consider when it comes to your child’s higher education – luckily, you’ve got the tools to succeed.
How Much is Too Much to Pay for College?
Unless you’ve been living under Patrick Star’s rock in Bikini Bottom, chances are you’ve heard about the woes of college costs. According to one recent report, the average cost of a college education in the United States is a whopping $35,331 per year.
Looking long term, that number isn’t likely to drop, either. In fact, from 2005 to 2016 the annual price of tuition to a public four-year institution rose by more than 3% per year.
We’ve already walked you through saving for college costs and even which savings accounts you can use to make the most of those funds, but how do you know when the price tag is just too high to be worth it? We’ve got you covered.
How Much is Too Much to Pay for College?
When figuring out how much you should pay for that sweet degree, keep this handy rule of thumb in mind:
Your total student loan debt should not exceed the average first year’s salary for the target job you (or your child) would like to get when they graduate.
That sounds like a mouthful, so let’s break it down. Think about what job you would like to land after you graduate. Want to be a Project Manager? How about a nurse? A rocket scientist? Your dream job can offer some insight into your future finances.
Whatever the average first year’s salary for that job is serves as a reference point for your college debt limit. If you still haven’t narrowed down that dream profession quite yet (looking at you, undeclared majors), fret not. You can think of your top three professions, crunch the numbers for each, and then average those salaries to find your debt benchmark.
Let’s see that equation in action, shall we?
Do Your Research, Crunch the Numbers
Put on your imagination cap for a minute – think about what that rule of thumb would look like if you wanted to become a teacher.
The first step would be to research what the average first-year salary for a teacher in the United States is sitting at. According to salary.com, that number is $41,388. This website is great because you can also adjust for specific location, additional degrees (such as a Master’s) and even performance. Keep in mind that these aren’t exact numbers, but they give you an idea of what you’d be making that first year out in the “real world.”
With those numbers in mind, you want to aim for a maximum of about $41,000 in total debt. For a four-year degree, that would come out to $10,000 in loans per year.
If you are going to earn your master’s and work your first year teaching in Boston, Massachusetts, the average estimated salary jumps to $46,632. That means a good goal for debt is around $7,600 or less per year (assuming it takes you six years to attain your bachelor and master’s degrees).
That doesn’t mean you necessarily need to limit your tuition costs to that number – just your loans. You’ll likely have other ways to reduce college expenses, like scholarships, family contributions, etc.
Looking into the Future
You’ll also want to keep in mind the projected job growth for your chosen occupation – AKA the amount of estimated job openings there will be in x amount of time. The U.S. Bureau of Labor and Statistics offers a handy Occupational Outlook Handbook that shows job growth projections for the years 2020-2030.
Using these projections, we can see that the expected growth for high school teachers in the United States is eight percent – which is on par with the national average.
College is expensive, and it can be tough to know if the debt is really worth it. Following this rule of thumb can help you keep your eventual debt-to-income ratio at a manageable level and set you up for financial success.
20 Tips When Saving for College
College is expensive, there’s no way around it. But those college degrees are major game-changers when it comes to getting job interviews. In today’s world – and your future children’s world – a degree can open a lot of doors in the professional world.
That’s why we’re letting you in on our top 20 money-saving tips to help you when saving for college. Whether you’re looking at higher education for yourself or your children, these tips are sure to help keep costs (and debt) low.
1. Know Your Options
A great starting point for your savings journey is to estimate how much money you’ll likely need for college.
College costs are rising all around, but there is still a big difference between the price tag of a four-year university and community college (especially if you live in one of these states). Likewise, the money you’ll need for in-state vs. out-of-state vs. private school tuition varies widely.
Check out our guide on estimating your total bill to get a ballpark figure of how much you’ll need to shell out for school.
2. Take (and Retake) Those College Entrance Exams
Grab your study guides and crack open those textbooks, because it’s time to talk college entrance exams.
Many scholarships take into account ACT or SAT scores. A single point higher could end up saving you hundreds or even thousands of dollars in tuition costs. There’s no limit on how many times students can take the SAT, and the ACT only caps attempts at 12. However, most students’ scores don’t change much after attempt number three.
Also keep in mind that these tests cost money to take, so if you haven’t put in the time and effort to boost your knowledge before the next testing date, it might not be worth the fees.
3. Research Scholarships
This is a no-brainer, but you definitely want to explore your scholarship options. There are some great websites out there that let you filter by anything and everything – the U.S. Department of Labor even offers a free scholarship search tool.
Some other places you can find scholarships include:
- Your college of choice’s financial aid office
- Your state grant agency
- Through your or your parents’ employer
- Local businesses, community groups or religious organizations
Remember, you can keep applying for scholarships every year!
4. Save with Tax-Advantaged Accounts
A savings account is a savings account, right?
Not quite – there are actually several different types of accounts you can use to boost your savings, including tax-advantaged accounts designed specifically for educational expenses.
From 529 plans to CVLIs and even Roth IRAs, we’ve got you covered. Explore the pros and cons to your savings account options here.
5. Stick Close to Home
Although every college has different costs, the general rule of thumb is this: a college in your state of residence will offer cheaper tuition prices than a college in a different state.
If you’re looking to significantly reduce your college costs, it’s best to keep close to home.
6. Get a Head Start at Community College (or Even High School)
Looking to get even better bang for your buck? Spend a few years getting those pesky gen-ed requirements checked off your to-do list.
Enrolling in college classes during high school or spending a couple years at a community college could lower the price of higher education by thousands of dollars. Just keep in mind that not every credit transfers to a four-year college. Consult with a counselor to avoid wasting money on unnecessary classes.
7. Rent or Borrow Books
If you thought the cost of tuition was high, just wait til you see the price tags they’re slapping on those textbooks – especially considering you’re required to purchase them for your classes.
The average cost for textbooks and other course supplies at a four-year university is a whopping $1,240 per year.
When saving for college, you can cut the amount you need by thousands of dollars by planning to rent or borrow books, either through the campus bookstore or an online retailer.
8. Explore Your Payment Plan Options
Most colleges offer payment plans for tuition, housing and even meal plans. Compare the costs of monthly installments versus an annual upfront payment – which is cheaper?
You can typically save money by paying everything upfront, but it’s good to know that payment plans are an option so you can build a savings plan that works for you.
9. Learn How to Cook with Just the Basics
Meal plans are pricey (and who wants to eat cafeteria food anyway?). But eating out every meal will drain your bank account faster than you can say “McDouble.”
People joke about living off of ramen and peanut butter and jelly sandwiches, but there’s a reason that’s such a common element of college stories. Money is tight when you’re in school and aren’t working full-time – your diet (or that of your child) will likely reflect that. And that’s okay!
10. Get a Credit Card
You’ve probably been warned against the dangers of credit cards, but they can also have some benefits – if you use them responsibly. Credit cards can help you build long-term credit and learn how to borrow money. Plus, several credit cards offer cash back or other bonuses to help you save more money.
A few things to keep in mind:
- Avoid annual fees like the plague
- Always pay off your balance by the end of the month
- Keep your utilization low (just because you can spend $1,000 doesn’t mean you should)
You can explore credit card options through sites like NerdWallet or CreditKarma.
11. Explore Student Worker Opportunities
Many colleges offer jobs on campus to help pay for tuition. It’s an especially great option when you need an employer that understands your hectic class schedule.
12. Live Off Campus
Living on campus is a great option – and the best way to get the full college experience. But living off campus has its perks too, including housing options that cost less. Sometimes you can find more space for less money, you just have to look.
Of course, living off campus usually means additional costs: furniture, utilities, gas for commuting… If living at home is an option, that could cut out even more of those options, but you have to decide which trade-offs you’re willing to make, whether you’re the student or the parent.
13. Become an RA
Resident Assistants typically get free/very reduced room and board, as well as a stipend for helping students with hosting events, checking in on other tenants and even solving roommate arguments.
We’re not saying it’s an easy job, but it may be worth it.
14. Invest in a Good Bike
If you haven’t heard already, gas is crazy expensive right now. It’s not uncommon to pay $100 or more for a single fill-up at the tank!
If you don’t have to travel too far for classes, consider investing a few hundred dollars in a bike to ride around town. Speedy zooms to class? Check. Little to no parking fees? Double check. Easy outdoor exercise every day of the week? You’ve got it. You can even get your groceries delivered for cheap these days!
Of course, biking is dependent on a few things like weather, safety and even storage, but if the stars align and you’ve been dreaming of toned calves, a bike is definitely the way to go.
15. Take Advantage of Free Stuff
College campuses are full of free stuff: Little Caesars pizza, extra-large t-shirts, even condoms.
It may not be stylish. It may not even be functional. But it’s free, and everyone likes free stuff!
16. Budget Like a Boss
Budgets are the backbone of any savings plan. Your budget should include every dollar that comes into your life, and every dollar that leaves your life. Sometimes creating a budget can help you see that your spending hasn’t exactly been on track with your priorities.
A budget can also help you identify ways to save money – maybe you’re spending way more on clothing than you need to, or you’ve accidentally signed up for Hulu twice. If you don’t pay attention to your finances, it’s harder to stay on track for your larger financial goals like college costs.
If your child is the one heading off to college, take some time to teach them how to balance a budget.
17. Use That Sweet Student Discount
Did you know that a ton of companies offer discounts for college students? That ID card isn’t just your ticket into the workout center, it’s also your pass for coupons and other great deals.
A few of our favorites:
- Amazon Prime, which offers six months free to students and then a reduced monthly subscription
- Hulu is just $1.99 per month for students
- Many movie theaters offer discount/free days for college students
- Adobe Creative Cloud’s $19.99/month plan for college students
And these are just the tip of the iceberg. Spend some time going through the subscriptions or services you already purchase regularly – do they have a discount program? It never hurts to ask!
18. Embrace Thrifting
It’s good for the environment and for the soul. Thrifting is like a treasure hunt – you never know what’s hidden at the “X.”
From textbooks to clothes and kitchen utensils, you can find high-quality stuff at steep discounts if you’re willing to do some digging.
Plus, online platforms like Facebook Marketplace and LetGo allow you to shop secondhand right from your couch.
19. Deduct Educational Expenses Next Tax Season
Some educational expenses can actually be deducted from your income on your tax return, saving you big bucks.
And it’s not just tuition and fees – you may also be able to deduct housing, textbooks and even supplies from your total income. Your best bet is to ask your tax planner or accountant for help (and bring your receipts when you do).
20. Work With a Financial advisor
Lastly, a financial advisor can help you find unique ways to save for college and reduce your overall education-related expenses. They’ve got the skills and expertise you need to both build a plan and put it in action.
In the old days, finding an advisor was like fishing in a huge lake – you never knew what kind of fish (if any) you were going to catch. Thanks to modern technology and apps like Lasso, you can now search for, filter and connect with advisors right from your phone.
College is expensive, and the cost is only growing. Stick to these 20 steps to save money and minimize your student debt.
How to Find an Advisor to Help You Build Your College Savings
Lasso offers a quick, easy-to-use interface that doesn’t require any financial know-how and puts you in the driver’s seat as you build plans for your (or your child’s) college education.
Start on your financial planning journey quickly with an easy profile-building process. Where many financial apps require that you link to multiple accounts before you do anything, Lasso lets you get right to work.
Get Started with Lasso
Once you’ve signed in to Lasso with a profile, it’s time to set a goal for your college fund. How much wealth do you have now? How much do you want, and by when? As you answer these questions in Lasso, your financial plan will start taking shape.
Choose the “Education” goal and answer these five questions to build your plan:
- Goal: How much do you want to save?
- Time: When do you want to save it by?
- Savings: How much do you have now?
- Contributions: How much can you save every year?
- Portfolio: How much risk are you comfortable taking?
Your college savings plan is now ready!
Now, you can play around with your inputs to see how they would impact your plan. See how a shorter time frame or more aggressive saving could impact your results. In just a few clicks, your financial plan is ready to go.
How to Find a Financial Advisor to Help You Save for College
Once you have a plan, you can browse a community of financial advisors and share that plan with as many advisors as you’d like for ideas on how it could be improved. Share your plan and see how they might be able to help improve it, without having to sign or pay anything.
You can share your plan with an advisor you already know, or browse the Lasso community for an advisor who matches your style. Filter by gender, experience, location and specialty to make sure you find an advisor you’re comfortable with.
After you share your plan for your college fund, wait for the advisor to respond with a proposal, which will show how they would improve your plan if you worked with them. When you get back proposals, you can decide whether or not there is a conversation worth pursuing.
People who build a plan to reach their savings goals are 10x more likely to accomplish them. The sooner you get started, the more you can save and the sooner you’ll have a fully funded college savings account.
Ready to get started? Click here to download Lasso now.