What do I Need to Know About Saving for College?
While every student is different, here are some of the basics you need to know when it comes to saving for college. The best thing you can do as a student is make sure you discuss with your parents what the plans are so you have an understanding of how much you can afford. You should also ask them how you can contribute to any savings and where you should be depositing your money if so.
Popular College Savings Accounts
Some of the main ways your parents may be saving for your education are...
A 529 plan is a savings account that is not subject to federal income tax and is set up by the parents for their child.
All withdrawals from the plan can only go towards education expenses, such as tuition and books, not on everyday living expenses such as getting groceries or haircuts.
Savings plans account earnings are based on market performance of investments such as mutual funds. Most 529 savings plans offer age based investment options. A 529 plan is best started when the individual is fairly young.
Custodial accounts are a savings account that the parents start, but the account is in the child's name.
A few things the parents have to take into account before setting up the custodial account is that the legally the money doesn't belong to them anymore, it belongs to the child, due to the fact that the account is in the child's name and any amount above $1000 is taxable and taxes will have to be filed for the account.
IRA stands for an Individual Retirement Account. The government allows a one-time withdrawal from an IRA account of $10,000 for qualified education expenses.
It is not recommended that parents tap into retirement accounts to contribute towards education costs. However, some parents use some of their savings from an IRA for this purpose and keep the bulk of their retirement savings in other accounts.
How Should I Begin Saving Money?
It may not seem like you can contribute much to your tuition expenses with a part time job, but let me give you an example of how much your money can add up just from working part time.
Georgia has a minimum wage of $5.15 per hour. The youngest someone can get a job in Georgia is fourteen years of age and from ages 14 and 15 the federal work hour restrictions limit them to 18 hours during a school week, and 8 hours on a non-school day.
If the future college student started working at age 14 in January of 2016, was paid $5.25 per hour, worked the 3 hours each school night plus 3 hours on Sunday and 8 hours on Saturday, it would bring their total weekly work hours to 26 hours each week during the school year. If the student put the bulk of their money towards savings, they could earn as much as $4,000 during the school year. If they were able to work full time over the summer they could bank an additional $2,000 bringing their total savings to $6,000 for a year.
If you were able to continue to save $6,000 a year for all four years of high school, you could end up with enough money to pay for a year of in-state tuition. Your money would go even farther if you were living at home rather than on campus.
Not every student will be able to put in this many hours at work. Calculate how far your earnings could go here.
This is a bit of an extreme example, but remember that interest rates can work for or against you. If you put money into savings for four years while in high school, your money will grow. However, if you take out the same amount in loans each year of your college career, the interest rate grows as well, adding to the total amount owed. Even if you aren't able to pay for a full year's tuition, earning enough money to pay the interest on your loans will do a lot to keep you out of excessive debt after graduation.
Do College Savings Affect Financial Aid?
Yes, but not enough to make a significant difference.
Under the current federal formulas, a student must contribute 20% of his or her assets to college costs each year. Parents or guardians only contribute 5.6%.
For this reason, it is typically better for parents to do the bulk of saving toward college. However, students are encouraged to open a savings account as well and put aside money from their jobs early on. Most likely you won't be making enough money to significantly affect how much financial aid you receive.