Planning for college and higher education costs requires some careful preparation. With the rising costs of tuition, it's important to start early and develop a plan to avoid your children bearing the full cost of student loans. We're seeing the devastating consequences of burdensome student loans on people's financial health play out real-time today. Below are steps to take to make sure you're prepared and to assist in helping secure your child's future.
Set Goals
First, as with any good financial plan, decide on an objective. In 2023, the average tuition cost to attend a private 4 year institution was $155,072. The average for public was $38,712. This doesn't factor in cost of books or living expenses which could be well over $10,000 per academic year. Also consider whether you want to cover the entire cost or just a portion of it.
Start Early
Like any investments, the sooner you start, the more time it has to grow. Compound interest can significantly boost your savings over time so start as soon as possible, even if it's just a small amount. It's ok if you haven't started yet so long as you start as soon as your able.
529 College Savings Plans
Consider funding a 529 savings plan. These are state-sponsored plans that offer tax advantages and are designed specifically for educational expenses. Contributions grow tax-free and withdrawals for qualified expenses are tax-exempt. Plus, starting in 2024, up to $35,000 in a 529 plan will be able to be converted tax-free into a Roth IRA which is helpful in the event your kid gets a scholarship or decides to pursue other avenues in life besides college education.
Diversify Investments
Diversify investments in college savings to minimize risk exposure. Decide upon a mix of stocks, bonds, and cash equivalents in the portfolio suitable to your child's age vs expected withdrawals. Generally, as as college age nears, the investments should shift towards a more conservative approach to avoid short-term market volatility.
Understand Tax Credits
Programs like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit can provide valuable tax benefits. As a first responder, there may also be additional college tax credits available so be sure to do your homework.
Involve Your Child
When old enough, encourage your child to contribute to their college fund through part-time work or summer jobs. Another option is to make your child pay "rent" once they reach a certain age and put that money into savings for them (either with or without them knowing). Both options help build financial responsibility and teach valuable life lessons.
Regularly Review and Adjust
Be sure to review your college savings plan periodically. Make adjustments to contributions and the investment strategy as needed. Consider seeking help from a financial planner or advisor. Speak with your union representative or check your union's website to see if there are any financial professionals recommended who have experience working with first responders.
Financial planning for college education is a long-term commitment requiring financial discipline. Setting clear goals, starting early, and using tax-advantaged accounts could create a solid foundation for future education expenses without sacrificing your current financial health.
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