The average cost of tuition at a public 4-year college is $25,362 and $46,950 for a private 4-year college. It is expected that college will cost closer to $100,000 for a 4-year school by 2030.
Do you know how much you need to start saving to afford college for yourself or your kids?
An investment in knowledge always pays the best interest.Benjamin Franklin
Budgeting for College
It’s important to create a budget even outside of college. The way you spend money will impact your current financial well-being but also may impact your future if you don’t budget accordingly. This includes if you’ve applied for any student loans.
The average student leaves college with around $30,000 in student loan debt. The cost of college and total loan debt is increasing each year while other means of paying for college (grants, scholarships, etc.) are not increasing along with it.
Not only that but most college kids juggle credit cards while in college to pay for all the “little things” like food and leisure. According to EverFi, nearly 50% of college students have two or more credit cards with at least $1,000 of credit card debt by the time they leave college.
Creating a College Budget
If you’re already in college or trying to plan a budget for while you’re there, the biggest goal is to minimize your expenses. There are several budgeting methods and techniques that you can use to help you along the way.
If you’re not ready to build a formal budget or you don’t have all the information to create one, you can follow these steps to get a rough idea of what your financials will look like:
- Take stock of your current savings and cash-on-hand.
- Try and identify expenses you’ll run into at college, like groceries.
- Try and identify any income you may receive while at college, like a part-time job or scholarships.
The basics of a budget still apply whether you’re in college or not. If your expenses are larger than your income you’ll need to balance that out or else you can find yourself in a financial hole or taking on more student debt or student loans.
Sample of a College Budget Plan
You can find an example of a student budget while they are in college. If you’re trying to create a budget while in school it should look relatively close to what we have here.
The easiest way to create this is to either find an app that works for you or simply create a Google Sheet or Excel file to start tracking your budget.
|Monthly||Semester (4.5 Months)|
|Student Loans (Refund)||$200|
|Books & Supplies||$25||$112.5|
|Total Fixed Expenses||$925||$4,162.5|
|Total Variable Expenses||$375||$1,687.5|
|Emergency Fund Contribution||$100||$400|
|Total Left (Savings)||$475||$2,187.5|
Saving for College
As the years press on it is getting harder and harder to graduate college with $0 in debt. The average college graduate’s debt is growing every year and if you haven’t started saving for college, or if you’re a parent who hasn’t started, it is never too late to do so.
A thing to keep in mind – at the current rate of debt growth, a recent college graduate is more likely to have student debt by the time their children enter college than having it paid off. This means if you were to graduate college and have a child within the first 1-2 years of graduation, your child is more likely to enter college before you pay off your debt. That’s crazy right?
Best Time to Start Saving for College
The best time to start saving for college is as early as possible. If you can fit it in your budget to start putting away money for yourself, or a child, you should try to do so.
If you’ve created a budget and are sticking to it then you have probably been putting away money towards savings.
If you haven’t started saving for college or started building a savings at all, you should make sure you do all of the following before you start saving for college:
- You have created a budget.
- You have $0 in debt or you have at least 80% of your debt paid off.
- You have an emergency fund with at least 6 months of expenses saved away.
- You have already allocated at least 10% of your monthly income into any retirement method of your choosing.
Keep in mind – you don’t actually need a college degree to have a successful career. A degree often helps get you there faster and often comes with a higher salary right off the bat but it is not always needed. For example, you could enter a trade and be making $75,000 or more a year within 1-2 years of training and you incur $0 in debt.
The goal is to attend college for $0 or as little as possible and to avoid taking on more debt while you’re in college.
How to Start a College Fund (for Parents)
The first step in building a college fund is to understand how much you will need to save for college. This amount is different for everyone and there are several tax-favored plans you can take advantage of.
There is no science in knowing until your child gets closer to the age they want to enter college and that can be years away. If you’re not sure you should primarily look to save around $1,000-1,500 each year for them, starting at age 1. The general rule of thumb is to have at least $20,000 in savings but the more you can save, the better.
Types of college funds you can buy into for your child:
- Education Savings Account (ESA) or Education IRA
- 529 Plan
- UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
Education Savings Account (ESA) or Education IRA
An ESA allows you to save $2,000 (after taxes are paid) per year, per child. The money you save grows tax-free and if the child or student uses it for education expenses it will stay tax-free.
If you start when your child is born and save $2,000 a year for 18 years you would only have around $36,000.
In an ESA, that $36,000 will be higher depending on the investments in the account. If you were to put $2,000/year away for 18 years that balance would be gaining interest each year and you could end up having around $50,000 to $75,000 (or more) depending on how the investments play out. Keep in mind, if you don’t use it for qualified expenses you will have to pay taxes on it.
Pros to the ESA Plan
- It’s tax-free.
- Variety of investing options so you control quite a bit.
Cons to the ESA Plan
- There are income limits.
- You can only contribute a max of $2,000 per year.
- The money needs to be used by the time the child or student hits 30.
If you don’t meet the income level for an ESA, you’ll most likely reach for a 529 Plan. A 529 Plan may allow you to choose the funds you invest through but not all do, you’ll want to select one that does. A 529 Plan has a much higher contribution limit around $300,000 and some can even allow you to change who the beneficiary is. This can come in handy if you set up a 529 Plan and your first born doesn’t go to college.
Pros to the 529 Plan
- Higher contribution rate ($300,000).
- Few, if any, income limits or age limits.
- It’s tax-free.
Cons to the 529 Plan
- May be charged if you transfer to another child.
UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
An UTMA/UGMA differs from a 529 Plan or ESA in that they are not designed only for education. The account is in the child’s name but is controlled by a custodian (typically the parent). The custodian will manage the account until the child or student is 21. At 21, the child or student can do whatever they want with the money.
Pros to the UTMA/UGMA Plan
- Funds can be used for more than just college.
- Tax advantages for the contributor.
Cons to the UTMA/UGMA Plan
- No restrictions on where/how to use the money and it may not be used for college.
- Beneficiaries cannot be changed after selection.
Saving in College
There is a key difference between saving for college and learning to save in college but they have a lot of the same fundamentals. While you’re in college you want to make sure you’re still creating a good budget and managing your finances to avoid going further in debt.
A few areas you’ll want to find ways to save money is on housing, food, tuition, supplies, transportation, entertainment. Not only can you save but you can also make money too. By avoiding debt, finding a part-time job or even selling off your stuff as you don’t need it can help you spend less while at college and potentially even have you leaving college with minimal debt.
A few college saving tips:
- Apply for any and every scholarship you can since it is free money.
- Try and take any AP classes or attend community college first.
- Find an on-campus job or work study.
- Establish a savings account and opt to fund it versus going out.
Paying for College
It’s no secret that college costs money and finding ways to pay for it without crippling your financial future is scary. If you weren’t fortunate enough to have a savings or inherited wealth you could be faced with making some decisions that will not only impact your immediate future but can also impact your retirement. The ability to pay for college has become one of the biggest economic problems in the USA and it can take anywhere from 10 to 30 years to pay off your student debts.
There is a lot more to paying for college than tuition and fees that most people don’t plan for. This causes them to take out extra loans or incur credit card debt just to cover.
There are really only two options when paying for college. You either pay for college yourself or you get help paying for college. This help can be a savings, student loans or scholarships, just to name a few.
Steps to Paying for College
Before you run out and apply for student loans you will want to exhaust all other efforts first. Keep in mind a student loan should be the last step in this entire process and only applied for if you direly need it. You should, and we advise you to, avoid taking out student loans for college.
These are the steps you should follow to pay for college:
- Select an Affordable School – This doesn’t mean select a “bad” school. It means you don’t need to go to Harvard to be a successful lawyer. You can get the same education at another university for half the price tag.
- Submit a FAFSA Application – It doesn’t matter if you’re rich or poor, you fill out a FAFSA. This helps the school and government find grants and scholarships that help you pay for your schooling. It is also the portal you’ll use to apply for student loans. Note: You are not applying for student loans, just free aid. The only time you don’t need to submit a FAFSA is if you’re paying for school in cash.
- Find & Apply for Scholarships & Grants – You should be applying for scholarships and finding ways to earn money the moment you entire high school. The earlier people apply for these the more likely they are to get them. The easiest ones to get should be related to your hobbies and interests. For example, if you were in the Boy Scouts and became an Eagle Scout they have scholarships available you can apply for to help you pay for school.
- Find a Work Study – A work study will allow you to work while you’re in school for either pay or credit. You have to apply for these early and the earlier you are the chances of you getting one are a lot higher.
- Dip Into Savings – You shouldn’t drain all of your savings but if you’re only a few hundred dollars off from paying off your yearly tuition without dipping into loans you should pay the difference. This also is when you should dip into any college funds a parent has set up.
- Apply for Federal Loans – If you’ve exhausted all of the options above and still have a balance left over, your only option is to apply for federal loans. These loans have several benefits and they work with you upon graduation to find a payment plan that fits your schedule.
- Apply for Private Loans – You shouldn’t even be contemplating this step, however, if you have no other options you should apply for private student loans. Keep in mind there is no way to get out of these loans and they follow you everywhere. A third party loan provider will not work with you like the federal government will and there is virtually zero help in paying these off.
A student loan operates just like other types of debt. There are a few differences between student loans and other loan and debt types that make it some of the most dangerous types of debt to have. It’s very important to research and make the right steps before taking out any student loans.
The first thing to understand than many forget is that student loan debt is still debt. You still owe someone money and in most cases, it’s the government. A couple simple rules still follow: you must pay it all back and it will accrue interest over time.
Types of Student Loans
There are many types of student loans out there but the main two categories are Federal Student Loans and Private Student Loans.
A Federal student loan is issued by the government through the Department of Education. There are multiple types of Federal student loans and multiple types of payment options. A Federal loan servicing company will handle the loan and they are contracted by the government to do so.
A private student loan is issued by a bank or credit union. These loans almost never offer any perks unlike Federal loans. They may offer better interest rates and in some cases better terms since they are trying to be competitive in the market.
The total Federal Student Loan debt: $1.47 trillion.
The total Private Student Loan debt: $123.14 billion.