Personal Finance and Investing

As we all know, college isn’t cheap and if you are the parents of a high school senior, you may be excited for them, but at the same time you may be dreading the choices you will have to make when it comes to selecting a college. There are so many things to consider like the schools location, tuition, room and board costs, and purchasing books for their classes. It can all be extremely overwhelming, but I have a few tips that are just in time for you and your newly christened high school senior as you prepare to make such big choices.

1.)

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Paying for your child’s education is an expensive business for any parent, but it is just about one of the most important things you will ever give your child, and their education is not something you want to cut corners on. Therefore, you need to plan to save for your child’s education as soon as possible, and you need to know you are contributing to your child’s education savings fund in the most effective way.

1 Start saving for your child’s education before they’re born

If you are planning to have children or if you already have one on the way then you know they are going to need to go to school, and complete some sort of study once they finish school. Whether your child decides to go to university, TAFE, a technical college or take up an apprenticeship you can start saving for their future now.

It doesn’t matter to begin with that you don’t know exactly what you are saving for because you know that in one form or another you are going to help pay for your child’s education. If your children are very young or still on the way you may also like to think about whether you will pay for just their high school education and encourage them to apply for a scholarship or get a part time job to pay their way through college, or whether you want to take care of all of their education costs so they can start their adult life debt free and with their own savings in the bank.

2 Research the costs of your child’s education

This is where you need to start thinking about the types of education you are saving for because having a savings target will help you stay on track with your savings plan, as well as help you reassess your savings and funds along the way. Also don’t forget to calculate the costs of the education, plus the incidental costs too; these include textbooks, workbooks, accommodation and travel.

Knowing when your child will need access to their education fund will also help you calculate how much you need. If you are saving for the college tuition of an unborn child you need to project the costs to what they will be 20 years in the future, if your child is already at school you only need to work out what tertiary education will cost in around 10 years.

3 Saving and investing tools, for your child’s education

So now you have an idea of how much you need to save for your child’s education, make sure you are using the right saving and investing tools to get you to that goal. Two of the main financial products you may choose start your child’s education savings with are a high interest savings account, or a term deposit account.

A high interest savings account is a flexible online savings account which allows you to make deposits from your everyday transaction account whenever it suits you; you can even set up a regular transfer every pay day to make sure that constant contributions are being made to your child’s future, without you having to remember. High interest savings accounts are usually fee free and will calculate a high rate of interest on your savings daily and pay you the compounded interest monthly. Because a high interest savings account is so easy to open and use, you can set up an education savings plan when you first start saving for your child’s future no matter how old they are, and you know your savings will be safe and will keep growing as they are in a stable bank account, rather than a sometimes unpredictable investment portfolio.

A term deposit account requires an initial investment to offer you substantial returns, and the longer the term you choose, the more interest you will be able to earn on your investment. You can often choose a term for your term deposit from one month to five years, but the longer the term, the better the returns and the greater the investment amount, the higher the interest rate you’ll be able to negotiate. Therefore, you may want to consider transferring some or all of the funds you have grown in a high interest savings account, into a term deposit account when your child starts high school, to give your education savings a boost in time for your child to decide what they want to study and where.

4 Education funds

There are a range of education funds and state operated savings plans which can help you save for your child’s education in a reduced tax or tax free account. Often education funds are run in a similar way to a scholarship plan and this is what makes them tax effective, some education saving plan contributions can even be tax free. Often an education fund can be opened for any child up to the age of 10 years old, and you or your parents – the grandparents – can make contributions regularly, or in lump sum contributions when you are able. Education funds will allow you to save for your child’s school or tertiary education and can be paid out as an allowance when your child goes to college to cover their books and living expenses.

5 Prepaid tuition

There are also state run programs which allow you to purchase a year (or however many years you choose) of tuition for your child at the cost they are now, to be redeemed when your child begins their study. This helps you overcome the issue of inflation affecting your savings, and saving an amount which covers the costs for your child’s education now, may not be enough to cover the costs when they actually need the funds.

There are a number of dedicated education saving financial products, and state and government initiatives will also vary depending where you live, and where your child decides to study. That’s why it is important for you to start with these top five tips and do your own research on the best way to save for your child’s education.

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With the cost of college tuition continuing to rise each year, it just makes sense to plan ahead for your child’s advanced education. The best thing about taking a long-term approach to college expense planning is that it enables you to make smaller contributions to your college fund over time, rather than trying to find the money to pay for tuition in one lump sum later in life. One of the best ways to invest in your child’s future education needs is to set up an Education IRA. These purpose-specific individual retirement accounts will enable you to ensure that the money you save for educational reasons is there when you and your child need it.

Education IRAs are flexible

These plans were first developed by the Federal government, which recognized that there was a savings gap between families of high and moderate income levels. Without a specific mechanism that allowed for college savings, most moderate income families could not manage to save enough money to pay for a child’s education later in life – especially since they were taxed on the growth that did occur in any savings account. The flexibility of this form of IRA enables the money to be taxed once, when the contribution is made, and then never be taxed again. These accounts can then be used for any educational purpose, including private high school, college, and trade schools.

Are there restrictions?

Like everything else created or administered by the Government, there are important restrictions attached to an Educational IRA. To begin with, your account can only be added to until your child reaches the age of eighteen years. After that, no more contributions can be made. In addition, you are only allowed to contribute so much per year to the account. Even more important for many families is the fact that once the money is contributed, you can never get it back. Even if your child decides not to go to college, the money in the account will go to him or her and not you.

How it grows

The chief benefit that many families find in using these accounts is in the area of taxation. In normal savings accounts – and other forms of investment, for that matter, the interest earned on the principal in the account is taxed on an annual basis. This, of course, reduces the overall amount of money that is available for the child’s education when it is eventually needed most. An educational account, targeted for the sole purpose of being used for college or other education expenses, avoids the tax on interest income that a normal account would face. As interested is compounded over time, it remains with the account and free of government obligation.

An Educational IRA is a great way for any family of moderate means to ensure that their child is able to pursue higher education free from the burden of costly college loans. As a parent, starting an account for your child is one of the best things that you can do to provide him or her with the greatest opportunity to have a better quality of life as an adult.

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Do you know that investing in a 529 education savings plan is one of the best ways to afford your child’s college education costs? Currently the most used financial option by parents, these college savings plans are more than just for studies. What about additional college education costs that your child may need to cover when he’s in college and of course let’s not forget the college tuition fees themselves. For those who do not invest in 529 savings plans there are alternatives so whatever decision you make in investing in child’s education, there are no right or wrong answers.

Why do parents go for college savings plans more than anything else? Because it’s an investment that will usually grow faster than the inflation rate and with a minimum monthly payment your child can have access to a large sum of money when they go to college thanks to you. How early you should start? The earlier the better because the earlier you start the less you have to invest a month in order to send your child to college. School is not only about learning but it’s also about having fun so it may not come as a surprise but the funds will not only go to school.

Like everybody else students do need to get entertained sometimes so the money invested in 529 plans may pay for education but it will also be used for other purchases. More important than entertainment, if your child lives on campus, there is the rent to consider, the food, the utility bills and other expenses related to the cost of living. So it’s important that whatever money is invested in a 529 savings plan takes care of your child’s additional expenses. The main use of the college savings plan is to pay college tuition.

The most expensive part of going to college is paying for college tuition fees of course. Varying from a few thousand dollars to almost $20,000, college costs are usually a big factor as to why some students will study two years instead of four. Another factor is whether they will go to private schools or public schools. It’s important to make the decisions beforehand so you can see if your child has funds and if they don’t, how much will they need in order to graduate from college. Some of you may not have enough time to invest in a college savings plan which is why there are quick financial alternatives for those in need.

Maybe faster than savings plan, there is one catch which is the money does not belong to you. A college loan is money that you borrowed which means you will have at least one creditor to who you owe a debt. Although you can get a huge amount of money in a short period of time, you have to pay it back with interest and the longer it takes you to pay it back to more it will cost you in interest. But if you are good with money management then loaning money will not be a problem for you.

Planning for a child’s college education is extremely important since college costs have been known to be rising much faster than inflation rate of the country. If you want to be able to compete with that inflation you must start early and investing in a 529 education saving plan when a child is still young will give you a big head start over the rising cost of college. Don’t leave your child’s college education to faith, your child believes in you so let’s keep it that way.

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College financial aid for students attending college and graduate school can come from several sources, including scholarship, grants, federal loans and private loans. It can become a complicated labyrinth that isn’t always easy to navigate.

Most college planners urge students to tap out on federal funding before turning to other sources, because financial loans tend to be less expensive in the long run. Unfortunately, because college tuition is so high today—and expected to continue to increase—federal loans many times only pay for a portion of college costs.

And while scholarship and grant money are available, the number of students who attend college on a full scholarship are few and far between. The smart thing to do when planning to pay for college if you don’t have a huge college fund at your disposal (most people don’t) is to apply for federal loans. Here’s why: Federal student loans often have an interest rate that is far lower than private financial institutions, and also offer better and longer payment terms.

Usually, students don’t have to start repaying the loan until after graduation, and sometimes can even defer payment of an original loan if the student goes back to school for additional training.

These federal loans don’t pay for everything. The most a four-year student can borrow is $10,500 per year, which for some colleges is just a bite out of a much bigger pie. For graduate programs, the loans can go up to $20,500. What any particular student receives is dependent on several factors, including the college of choice and in which year the student is.

Students can choose from three federal loan programs:

—Stafford loans are available to students in two forms: for low-income students, who don’t have to provide credit references, and for other students, who do.

—Plus loans are low-interest loans taken out by parents to help pay the difference between real college costs and the amount of the student loan. Still, even with this loan tuition costs often exceed what the loans cover.

—Consolidation loans allow parents and students to consolidate multiple loans into a single loan with one monthly payment.

When students apply for a federal student loan, they fill out a Free Application for Federal Student Aid (FAFSA), which automatically includes their information for other programs, including scholarships, grants, or work programs provided by the federal and local governments.

Because financial loans are covering less and less a percentage of college tuition, private financial loans are becoming more popular. Unfortunately, as with any private loan, only those with the best credit scores will receive the best rates. Private loans can be expensive and most college planners urge parents to exhaust other financing methods first.

The best private loans have rates competitive with the federal low-interest rates, about LIBOR +/- 2.0. Watch for lenders that offer a low rate while the student is in school, then raise the rate when payments are due.

As with anything, shop around, do your research, and perhaps paying for college won’t be such a nightmare.

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