Education is the most valuable investment, but the cost of education is unprecedentedly high. It seems implausible to be able to fund education without taking on debt, but it is not. Parents just need to plan around it a few years early, but before that, you need to understand the actual cost of education.
The average annual cost of tuition is about £10,000. However, it is four times higher if you pursue it from a private college. Do not forget the additional cost of accommodation, books, and associated expenses. They can be between £15,000 and £20,000. Tuition fees are spiked almost every other year. Since your children will be going to college almost a decade later, it is not hard to prognosticate what the education cost will be, given that the cost is rapidly increasing.
There are various funding sources, but you must understand all of them. Not to mention, you should start stashing away. In addition, you can fund it from scholarships and financial aid, too.
Strategies to fund your children’s education
Here are some useful strategies to fund your children’s education:
Consider an education savings plan
Since the cost of education is rapidly increasing, it is always suggested that you start saving money as soon as possible. The sooner you start, the better it is. This is specifically correct for those who do not earn a significantly high amount of income. If you keep contributing a small amount of money, it will become a considerable amount of money over time. Here is how you can consider building an education savings plan:
529 college savings plan
A 529 college savings plan is aimed at saving money for education expenses. No taxes are levied on these savings if you use the whole amount for meeting education expenses.
- You can contribute as much as you can based on your income. Your contributions are tax-deductible.
- You are not allowed to withdraw these funds for any expenses other than schooling, accommodation, and tuition fees.
- There are a few plans that allow you to transfer unused funds to your second child.
This plan also enables you to select an investment portfolio based on your risk-tolerance capacity.
Coverdell Education Savings Account (ESA)
Another savings account in which you can contribute your hard-earned money for the future education of your children is a Coverdell ESA. This is also a tax-deductible account. However, it allows maximum contributions up to £2,000 per annum per child.
- These savings accounts also intend to cover K-12 expenses, along with college fees and tuition.
- It can cover all types of education-related expenses, not just academic ones. For instance, it can also help you pay for a computer, software, technology, equipment, and the like, as long as they have a connection with learning.
- It is more flexible than a 529 plan in relation to creating an investment portfolio.
It is worth noting that you will have to pay a 10% penalty if you dip into funds for non-qualifying expenses. Unused funds can be saved for another child’s education.
High-yielding savings account
Never underestimate the importance of a high-yielding savings account. These savings accounts will help you earn high interest on your contributions. Over time, when some money accumulates, you can buy a fixed deposit. It will help you earn compound interest. This will help grow money faster for your children.
- The greatest benefit of this type of account is that funds remain accessible. Unlike investment, you can easily avoid bearing the risk of losing money.
- However, interest rates will be lower as compared to those on stocks and mutual funds.
You should start contributing to these accounts as soon as you start raising your family.
Invest strategically
It is vital to grow your money to offset the impact of inflation. Stocks and mutual funds are ideal investments to grow education savings for your child. Focus on an aggressive investment strategy; however, make sure that you do not take on risks more than you should.
At the time of choosing an investment portfolio, you should ensure that you will invest all your money into high-risk assets. Make sure that you have calculated your risk-tolerance capacity and create a blend of high-risk and low-risk assets.
Automate your contribution to ensure consistency. Consult an expert to help you create a functional and realistic investment portfolio.
Explore grants and scholarships
Though investment will help you take advantage of the compounding effect, you will still need to rely on scholarships and grants. They can reduce the final burden on you. Therefore, it is crucial for your child not to do anything that results in demerit.
If your child is good at academics, they can apply for merit-based scholarships. Look for state and federal grants. Try to check the eligibility criteria in advance for Federal Student Aid.
In addition to scholarships and government grants, you can also consider student loans. They do not have to be from private lenders. Your child can apply for Federal student loans. These loans are different from private loans. They offer very low interest rates. You will start making payments when you start earning money. Federal student loans are paid off using an income-contingency plan.
Private student loans should be used as a last resort. However, bear in mind that these loans require you to make payments immediately. They come with relatively higher interest rates and fewer protections.
Indoctrinate smart financial habits among your children
While savings are essential, you should indoctrinate good financial habits in your children. Ensure that they learn budgeting techniques; this would be possible only when you have money conversations with them.
Teach them how children can learn to build good credit habits. They should be aware of the key difference between good and bad habits. Responsible spending is key to a good financial life. They should also explore career paths that align with financial stability.
The bottom line
Funding your children’s education does not need to be complicated. There are various ways, but it is essential that you understand them very carefully.
