Family life: how to save money for your child’s higher education?

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A good education is a goal most parents have for their children. The reason is quite understandable: more education opens the gateway to better, higher-paying jobs.

In fact, as Brookings Institution determined, “an individual with a college degree is nearly nine times more likely to make over $100,000 than someone with only a high school diploma.”

Who wouldn't want that for their children?

However, the path is not strewn with roses. The rising cost of post-secondary education has many parents concerned about whether they will be able to afford to send their children to college or university. It is no secret that college tuition and student-loan debt are higher than ever in the United States. So what can a family do to get prepared, as easy and efficient as possible, to face these immense costs? The answer is only one: starting to save money for your children’s higher education.

Although financial priorities change over time, education is usually an expense that families can't avoid. Currently, 37 percent of Americans between the ages of 25 to 34 have at least a bachelor’s degree, and the numbers are going up. Every family wants to provide their children with the opportunity of getting a higher education and, as result, more chances of succeeding in the job market. But before giving some tips on building a savings plan, here is some information worth knowing

How much does it cost to study in the United States?

The United States is one of the world’s most popular destinations for higher education; and, as such, it is also one of the most expensive. According to CollegeBoard’s statistics, these are the average costs for an American student in 2020/2021:

Looking at these numbers, it is easy to understand the struggles students and families face in paying for college - especially if we consider all the extra expenses, such as books and groceries, that add up to the equation. According to HSBC’s 2018 report, many university students rely on extra-curricular jobs to cover these costs. As the study found, over 4 in 5 students (85 percent) are working in paid employment while studying out of financial necessity.

As for the parents, studies estimate that they contribute on average $17,314 towards their child’s undergraduate or postgraduate university education. But that is not all: many also help with day-to-day expenses, from groceries to accommodation. According to HSBC’s report, “personal sacrifices are common among parents who are funding their child’s university education.” The majority admits that they have stopped or reduced their leisure activities, and also taken fewer holidays to support their child’s education. Almost 40 percent have also taken on extra hours at work and/or a second job to support their child's education.

What is the average student loan debt?

Currently, about 43 million adult Americans carry a federal student loan and owe $1.6 trillion in federal student loan debt. According to Forbes, these are the states with the highest and lowest average student loan debt per student:

As astonishing as it sounds, from the late 80s to the present, the cost of an undergraduate degree increased by 213% at public schools and 129% at private schools. Families are struggling to keep up, which is why having student loan debt is increasingly more common all over the United States.

Although it is impossible for most young Americans to avoid getting in debt for their education, it is possible to reduce the amount of student loan debt. Exhausting sources of free money, such as grants and scholarships, is the easiest and efficient way to do so. The other, as you can guess, requires planning and saving. So if you want to start to save money for your children's higher education, don't miss our tips.

How can you efficiently save money for your children’s education?

  • Start saving as soon as possible.

It is never too late to start saving for your child’s education. However, as data shows,  you should start doing it as soon as possible. Set a realistic goal (considering the current average prices and how they tend to increase), and estimate how much you will need to save weekly/monthly to reach it. Consider that, for most Americans, the age to enroll in post-secondary education is between 18 to 20, and that, by then, you should have accomplished your savings goal.
To begin with, we recommend you set aside 3% to 5% of your net monthly income. While these amounts won't disrupt your budget too much, they are enough to build a substantial sum in a few years.  And remember: time really matters when it comes to saving. Putting away just $20 a week can make a huge difference in 15 years.

  • Make some changes to your lifestyle.

If time isn't on your side, you can always change your leisure habits and consumerism to save as much as possible without jeopardizing your quality of life. For instance, be selective of your ephemeral pleasures (how often you go to restaurants, concerts, exhibitions, etc.), skip expensive hobbies, and rethink your holidays. Most importantly, try to determine a monthly budget for your household, considering that at least 3% of the monthly income should go towards a savings account. It might not seem like it, but even small sacrifices, such as canceling your gym membership, can make a big difference after a couple of years.

  • Open a 529 Plan.

For many Americans, this is the best option to efficiently save money for education. As SavingForCollege determines, a 529 plan, legally known as a qualified tuition plan, is “a college savings plan that offers tax and financial aid benefits.” In the U.S., there are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan, which is why you must study your options before making any decision. A piece of advice? Look for a plan that allows you to choose the funds you invest in through the account, and that gives you the option to change the beneficiary to another family member. This way, if your oldest child decides not to go to college, you can change the plan to a qualifying family member who will.

  • Open a Coverdell Education Savings Account.

A Coverdell Education Savings Account is, as described in Investopedia, “ a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established.” As you can figure, it is considerably similar to a 529 Plan, but with a few distinctions worth considering. For instance, Coverdell ESAs offer more investment flexibility and don't lock away the funds until college. In fact, your family can even use the money tax-free to pay for other children’s K-12 expenses. On the other hand, Coverdell plans have several limits (such as age) that don’t exist in 529 accounts.

  • Use a Roth IRA (Individual Retirement Account).

Most people think of the Roth IRA as an excellent method to save for retirement, without realizing that it also a great option to save for educational expenses. In some situations, it might even be preferable to using a 529 plan. Here is why: in the Roth IRA, flexibility is key. You can save money now and decide later what you want to use it for, with no obligation to use the funds for educational purposes. While 529 plans are only meant to cover the costs associated with college, Roth IRAs can be used for both college expenses and retirement income, or even for non-retirement-related financial goals.

  • Open a Trust account.

Trust Accounts, structured as UGMAs and UTMAs, are assets transferred to a child’s account and invested on her/his behalf until the “age of trust termination,” which is usually between 18 and 21. One of the most significant benefits of this type of account is its flexibility. In a Trust Account, there are no restrictions on the amount of money you can put away for your child. Moreover, the assets can be used however he/she desires after reaching adulthood (even for something other than college). The big drawback is that it is impossible to change the beneficiary.

  • Get a Life Insurance plan.

A permanent life insurance policy (also known as whole life insurance) is a conventional life insurance policy. The big advantage is that while some of the money from the premium goes into the death benefit, the other goes into a tax-deferred savings account. With these plans, most policyholders can expect a return of anywhere from 3% to 6% after the first years. Meanwhile, the money in the cash-value account grows tax-deferred, just like it would in a 529 plan. Yet, unlike in a  529 plan (that offers tax-free withdrawals only when the funds go towards qualified education expenses), life insurance policies allow you to pay for living expenses, as well as things that have nothing to do with college. If you want to help your child put a down payment on a house, for instance, life insurance will enable you to do so.

How Life Insurance can help you

Given the costs of pursuing a university degree in the United States, finding a good plan to save money for education is becoming a priority for most families. Like you’ve seen, there are many ways to do so, from small adjustments in your family’s leisure activities to all sorts of savings accounts. It is up to you to determine the right option for you and your children. 

But one thing is for sure: planning for the future is never a bad idea. And when we have a family that we care about - and who depend on us - this is even more important.

That is why at Insurance Supermarket we offer life insurance plans made to protect your loved ones. No matter what life brings, our policies will keep them protected, so that their lifestyle and goals are never compromised. With us, you can cover your children’s education until adulthood and make sure that they get the opportunities they deserve.

If you are interested, explore what our products can do for you and apply for a free no-obligation quote. We don’t require medical exams, paperwork, or face-to-face meetings to give you the insurance plan you deserve. We truly make insurance easy. And if you want to save money for your children's education, this might be the best option for you!

 

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