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Successfully planning and saving for your own financial future is daunting enough. But for parents who hope to help their kids pay for college, things are even tougher.
It may seem impossible to square this generous goal with personal financial objectives, even fundamental ones like saving for retirement. After all, there's a reason the student loan debt total has topped $1.5 trillion this year. College is nothing if not expensive.
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But if you're savvy enough to plan, it's possible to enjoy your retirement while ensuring Junior gets his Bachelor's degree debt-free, or at least with less debt than his peers.
We've said it before and we'll say it again: the power of compound interest is pretty much your best friend in all things finance. And if you want to get the maximum benefit of that power, it pays -- literally -- to start investing early.
Here's an illustration. Let's say you start socking away just $50 per biweekly paycheck when you're 22. With a fairly modest annual return rate of 6%, you'd amass $238,509.64 by age 65 -- and that's not counting any additional employer match or profit-sharing contributions. But if you wait to start saving until age 45, you'll end up with only $140,373.82 by your 65th birthday, even if you up your contributions to $300 a month. By starting your retirement fund early, you'll not only have a more comfortable nest egg when the time comes to retire, you'll also have more wiggle room when it comes to allocating funds to other goals, like paying for college.
A 529 is a savings account designed specifically to help parents stash cash for their children's education. They carry high contribution limits, with the IRS stipulating only that you cannot contribute more than the beneficiary would actually need for qualified educational expenses . Thus, they are a robust resource to help you pay for college, especially because qualified distributions are entirely tax free. And if you live in one of the 30-plus states with relevant legislation, your contributions may make you eligible for a tax deduction or a tax credit.
Many states offer generous grants and scholarships to residents who attend public institutions. For instance, Florida offers a stellar program called Bright Futures, which awards up to 100% of tuition costs to students who qualify based on various merit-based achievements.
Local universities probably offer lower tuition costs to in-state residents so it pays to stay local for schooling if it's an option. You might also consider sending your child to a less expensive community college first with the goal of transfering to a more expensive university to complete their degree. This method lets you get a bargain on those basic prerequisite classes while still enabling your child to study their chosen major at a well-regarded, recognizable institution where they'll receive their degree.
Even subsidized student loans can haunt borrowers for years to come, whereas scholarships and grants are free money -- two words that seldom appear together -- it's unconscionable not to take advantage of them.
Even if your student isn't at the tippy-top of his class, there are many different scholarships and grant programs to apply for, some of which award funds for reasons far broader than traditional academic merit. (For instance, Stuck at Prom awards prizes of up to $10,000 to high school students who design their prom outfits out of duct tape. Yes, really.)
Although building enough wealth to retire comfortably and fund your child's college education is undeniably challenging, the two goals don't have to be mutually exclusive. Achieving them will take forethought and perseverance, but your efforts will pay dividends down the line for both you and your student as you enjoy your retirement and they reap the benefits of their college education.