Student loan debt is a huge burden for many families and students. According to the Federal Reserve’s Consumer Credit report, 13% of the population – or 43.6 million Americans – faced some form of federal or private student loan debt at the end of 2022.
As parents, we’d like to spare our kids from having too much debt when they graduate and begin their careers, even if that means stashing away money in a college fund to help out. The reality, though, is that between taking care of bills, knocking down debt, and investing for your retirement, there sometimes isn’t that much money left to save for the costs of pursuing higher education.
Here are a few key ways you can set aside money for college without taking too much away from your other financial goals.
Time Can Be an Ally
First off, if your kids are in grade school or younger, you have a huge advantage when it comes to college savings: time.
Opening up a Coverdell Education Savings Accounts (ESA) or a 529 plan can be a fantastic way to save for your kid’s college expenses down the line as well as receive some financial breaks (think taxes!). These accounts allow you to save and invest money through the years. The more time you have between when you start contributing and when you begin withdrawing, the better.
Compound interest can help snowball your contributions to a more meaningful amount without requiring you to invest a ton of money. With both types of accounts, you can invest your money, and it grows tax-free. If they are used for educational expenses (like tuition at a qualified institution), you can withdraw tax-free as well.
ESA accounts can be used to pay for K-12 expenses; however, you’re limited to a maximum contribution of $2,000 each year. While the 529 plan actually has no contribution limit, most parents cap annual contributions at $17,000 per year so as not to incur the federal gift tax (or $34,000 per year for a married couple).
Benefits of the 529 Plan
Under previous tax law, the benefits of 529 plans were limited to a college education only, but now the law expands its use and parents can now use the 529 plan to pay for their children’s education at private elementary and high schools.
This was a benefit previously provided only by Coverdell Education Savings Accounts (ESA). The 529 plan is now available to parents of younger children in private schools and expands the options that parents have to educate their children since they will see some tax benefit if they chose to send their kids to private school.
You should also check to see if your state offers a tax deduction for your contributions since opening them up is a fairly straightforward and easy process.
The Fine Art of Scholarship Hunting
What if your kid is older and you don’t have that many years before they are attending college – how can you ‘catch-up’ on savings? Well, first off, you can help your child master the art of scholarship hunting.
When I interviewed College Admissions Coach and Scholarship Strategist Pam Andrews, I found there are plenty of ways you can get the ball rolling:
- Know your options with schools. Pam’s son was interested in art, so they started examining highly rated art schools as well as in-state options with strong art programs. They also considered how generous a school was with their financial aid packages.
- Review all of your connections. Don’t just focus on the big popular scholarship sites when hunting. See if your company, professional and/or recreational organizations, and industry offer scholarships.
- It all adds up. While big dollars can be attractive when trying to decide where to apply for a scholarship, you can bet there will be plenty of competition. Mix up and spread out your applications so you can grow your scholarship funds through multiple programs.
She used these strategies plus more to help her son win over $700,000 in scholarships!
Finessing Your Budget for College Savings
Either way, you need money to contribute to your kid’s college fund. As you’re getting started, remember to do the following:
- Know your numbers. The first step is to see if you have any money leaks in your budget – those ‘extra’ expenses that aren’t exactly in your budget.
- Focus on one expense at a time. I know we want to slash everything at once, but if you want to save up for college without impacting morale along the way, slow and steady will win the race. Do a money challenge – it’s a fun way to reduce your expenses which can then be redirected to the college fun.
- Be a part of the gig economy. Honestly, sometimes you just need to earn more money if you want to hit all of your goals. And that doesn’t mean you have to tie yourself down with another job. Working a flexible schedule with gigs like Uber and Fiverr can make a big difference in your budget if you’re interested in making some extra cash.
Thoughts on College Savings
I’d love to get your take on saving for college. How are you juggling everything? What plans are you contributing to?
Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.
Studying Abroad This Fall? Make Sure You Know These Tax…
Back to School Series: It’s Time to Use Your 529…
One response to “College Student Budget 101 (How to Create a College Budget)”