One of the most important things parents can do for
their children is invest in their education. Education is not cheap and
recently education costs have outpaced inflation; So planning for college
expenses has to be done in a way that will allow saving for college and beating
inflation at the same time.
Let’s just take a look at a simple scenario and see
how much a child’s education can cost.
Let’s assume that the child is currently 10 years
old, and the anticipated college age will be 18-22 years old. So really, the
parents have just 8 years or so- to accumulate the funds necessary to pay for
child’s education.
Also, let’s assume that the current tuition is
$13,000/year (this is an average, but if your child wants to go to Harvard
University you might need as much as $46,000/year) Let’s just do the average
calculations for the purpose of this example. Also, let’s assume that the
inflation is 6% (again, that is an assumption the inflation now is at 2 or 3%
per year, but let’s be conservative ad set it at 6% for now)
Inflation is kind of a big deal it “eats” a certain
chunk of your money. In other words, $13,000 today will be worth much less in 8
years in our example (when the child will be 18 years old and ready to enter
their freshmen year) At that point, considering inflation you will need more than
$13,000 to pay for his first year of college. To be exact, you will need
$20,720 in today’s money – based on the above assumptions.
Here is the breakdown of calculations: College costs
considering inflation
(Again, we
are looking at the future value)
-freshman year: $20,720 [$13,000 x (1.06)*8]
Sophomore year: $21,963 [$13,000 x (1.06)*9]
Junior year: $23,281 [$13,000 x (1.06)*10]
Senior year: $24,678 [$13,000 x (1.06)*11]
So, estimated cost of tuition based on the above for
4 years in college will be: $90,642
Again, the calculations above are average and do not
include such expenses as room, board and other costs. Because college is such a
major investment, families should carefully evaluate potential schools and plan
ahead!
Relying on financial aid is one way of covering the
education costs, however most financial aid packages depend heavily on the
financial need of the student and not everyone qualifies.
Student loans are also an option- but really those
should be the last resort. In my opinion, loans are for those that fail to plan
ahead. Loans are more expensive in the long run. Other better options
to fund college education are:
529 Plans
Coverdell Education Savings Accounts
Qualifying U.S. Savings Bonds
Roth IRA
Traditional IRA (although, this is not intended for college funding)
UGMA/UTMA The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act
Mutual Funds
529 ABLE Plan
Coverdell Education Savings Accounts
Qualifying U.S. Savings Bonds
Roth IRA
Traditional IRA (although, this is not intended for college funding)
UGMA/UTMA The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act
Mutual Funds
529 ABLE Plan
And so on.
These are great options
that will allow parents to plan ahead. There are various rules related to these
plans. I will have separate videos on all these plans and will cover in detail
each and every one of them by providing advantages, disadvantages, tax rules
and so on. So, stay tuned. Please subscribe to our YouTube channel for fresh and new
videos and learn with us!
Thank you for watching!
Comments
Post a Comment