Katie Krumpter, NYLAG Senior Financial Counselor
One of the biggest concerns for parents, sometimes even before they have their first child, is how they will cover the cost of college for their kids. Much of this stems from the fact that the generation having most of the children these days, millennials, have the most student loans of any generation ever and the lowest homeownership rate of any prior generation. Georgetown University published a study in 2021 that showed that, while 66% of jobs require a postsecondary education today (versus 25% in 1980), the cost of college has increased by a whopping 169% while the pay for workers aged 22-27 has only increased by 19%.
So, how does one afford college tuition? The answer: the same way you do with any significant cost–saving early and often. Below we explore the different ways in which you can start tackling this issue:
1. 529 Plan
The most tax advantaged way to save for postsecondary education expenses is through a 529 Plan. A 529 Plan is an investment account that grows tax free, as long as the funds are used for qualified education expenses, as defined by the plan. Some states will even give a tax deduction to residents who contribute to their state’s plan (New York does).
- Tip: The NY state plan, which is an excellent choice for NY residents, can be found at NY’s 529 College Savings Program. An excellent resource to compare various state’s 529 plans is at Saving for College 529 Comparison.
2. NYC Kids RISE Save for College Program
Open for people who live in New York City and have a child in public school, this program gives every NYC kindergartner a starting contribution of $100 to a 529 plan in their name. There are certain other milestones that, if completed, allow for additional contributions from the program. Immigration status does not matter–every new kindergartner can participate, and the program rolled out citywide in fall 2021.
- Tip: The NYC Kids RISE program can be found NYC Kids RISE. If you do not live in NYC, check out last year’s CNBC’s article with a list of other states with similar programs.
3. FAFSA application
Every college student should also fill out their FAFSA form, which will determine eligibility for PELL grants as well as scholarships your school may offer. The FAFSA must also be completed if you want to take any federal student loans. There are also thousands of scholarships that people can apply for, and many resources to locate them. Obviously, the internet is an excellent resource, but there are also books listing available scholarships, such as The Ultimate Scholarship Book 2023.
4. Consistent savings
Lastly, a lot of people worry about how to save such a large amount, so it’s sometimes hard to get started. Maybe when your child is too young for school your monthly contributions can’t be much because you are paying for childcare. Nevertheless, you can start small and then increase your monthly contributions.
Suppose you contribute $25 per month to a 529 plan for the first two years of your child’s life. Then you increase your savings to $100 per month from age three until they turn 16. Finally, after age 16, your savings drop to $0. The table below shows you what you could accomplish by saving consistently. Note that these calculations assume an average return of 6% per year and, in this example, the monthly returns vary for a more realistic effect. As you can see, based on the above assumptions, you could save as much as $30,000!
- Tip: Keep in mind that not all funds perform at 6%, some perform at a lower percentage and some at a higher percentage. To see an example of this, visit this page of the NY’s 529 College Savings Program’s price & performance page.
|Year||Initial savings amount (Start of year)||Total yearly savings contributed||Return per year (%)||Return ($)||Final amount (End of year)|
When thinking about having a child, sometimes the cost of college is a deterrent. While college can be incredibly expensive, remember that there are some ways to save for it. Just like saving for retirement, saving on a consistent basis is one of the most important things.
Still have questions?
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