By Samantha Cornelius, Associate Relationship Manager at FFR Wealth Team
Looking back on the end of high school, I was never quite as focused on the economic impact college would have on me in the future, instead 18-year-old me was craving the “experience” and “worldliness” that I would gain by moving hours away from where I had grown up. And my parents, who had been aiding my older siblings with financing college as best they could for the previous eight years, couldn’t bear to hold me back from what I so eagerly wanted—the more expensive university and the opportunities that my older brother and sister were offered. Now, here I stand with a degree and the perspective of a four-years older me, kicking myself for not knowing then what I know now, and quite literally paying the price for it.
Whether you are a student, parent of a student, or even a future parent of a student, this article is for you so that you can possess the knowledge I did not. My hope for you is, when college is behind you, you can look back and thank yourself for implementing some of these tips and tricks rather than worrying about paying back tens to hundreds of thousands of dollars in student loan debt.
Education Savings Accounts
Did you know there are specific accounts you can open for college savings that provide you a higher rate of interest than a traditional bank savings account and offer you a tax break on your distributions, unlike a traditional investment account?
Rather than contributing your college savings to a traditional savings account which typically have an interest rate of around 0.01%, you can use a specific education savings account such as a 529 that has more market exposure and potential for capital appreciation. For instance, if you put $1,200/year into your savings account, in 10 years you would still only have around $12,000, recognizing almost no growth. If you put that same amount in an education savings account with market exposure, you would have closer to $15,000 (assuming an average return of 5%*). The best part is, your distributions for qualified education expenses (i.e. tuition, books, housing, etc.) are tax free, unlike in an investment account where growth is subject to capital gains tax.
Perhaps the most important thing I wish I (or my parents) knew about saving for college is that time is your best friend! Getting started earlier will lessen the financial impact of saving for college; instead of waiting until you or your student is four years away from college and putting away $20,000/year to try to catch up, you could start when you or your student is ten years away from college, putting away only $8,000/year.
Time is also a huge consideration when using a 529 account for college savings. The more time your money has to compound, the more growth potential your savings has. Use the SEC’s compound interest calculator to see what impact time and compounding could have on your college savings!
Even if you or your student isn’t a star athlete or a straight A student, scholarships are still an option. Thousands of private scholarships and grants are awarded each year to students who are willing to put in the effort to apply. Private scholarships are often awarded in smaller amounts, but there is no limit to how many you can receive. Several $500-$2000 scholarships add up quickly and can easily amount to a full semester or years’ worth of tuition and expenses. Private scholarships are available to students ranging from elementary school age to college grads who are working toward paying back student loans. There are several online platforms that will help you find these scholarships based on your age/current school level, field of study, and demographic. One free, online platform I am currently using to find scholarships is Scholarship Owl, but a quick google search will provide you with countless resources.
Many people looking into higher education have heard the term FAFSA thrown around, but if you are anything like I was, you don’t really know what it means or what it does for you. FAFSA is the Federal Application for Federal Student Aid and must be filed out annually in the years you or your student attends college if you are planning to receive federal loans/aid. It helps determine if you are eligible for federal aid, grants, work-study programs, and much more. A key point to keep in mind regarding the annual filing is that the earlier you submit your FAFSA application, the more aid you are likely to receive. I, personally, have lost thousands in aid by not filing the FAFSA in the years that I didn’t need to take out federal loans, so learn from me and always file regardless of your loan situation (or lack thereof) in any given year.
With the costs of higher education rising at alarming rates—more than doubling since the year 2000—it can seem daunting to many families to begin saving and planning for such a large expense. If there is one thing you take from this article, let it be that it is never too late to start. Regardless of your time horizon or capacity to save, every bit helps when the time comes to making one of, if not the biggest, purchases of your life.
*Market returns are not guaranteed and may vary. The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product [and/or service].