Hey everyone, so college is one of the biggest expenses you face as a young twenty-something.
According to data from valuepenguin.com, the cost of college is, on average, anywhere from
$4,800 a year for a typical community college to as much as $50,000 a year or more for a
private four-year college.
That’s quite a chunk of change to somebody who’s just graduated high school.
So it’s not surprising that the student loan debt in America is over $1.5 trillion
with the average person carrying approximately $30,000 in student loans.
Even with the additional income commanded by those with at least a bachelor’s degree
that amount of debt can really hamper early progress toward financial success.
This is especially true if you happen to graduate during a time when good jobs are scarce as
many people have in recent years.
So that begs the question of how we can better prepare ourselves for the costs of higher
education?
That’s what we’re going to be talking about today.
In today’s video, we’re going to be discussing how to save money for college.
There
is no doubt that college is great for some people.
Higher education is downright mandatory for certain career paths like doctors and lawyers,
but it isn't for everybody.
You can create a very comfortable life for yourself with or without a degree.
So before we talk about how to save money for college I want to briefly discuss some
statistics and reasons why some of you may not actually need college at all.
According to the Bureau of Labor Statistics, the median income for high school graduates
in 2017 was about $37,300 per year.
For those with bachelor’s degrees, it was about $61,800.
And for those with advanced degrees, it was about $75,400.
There’s certainly a pretty big leap between high school graduates and those who have at
least a bachelor’s degree, but we also have to consider the time it takes to get that
degree and the cost of college itself.
According to ValuePenguin.com the average annual cost of a four-year college for in-state
residents is about $25,000.
For out of state residents that number increases to nearly $41,000 a year.
Private schools are even more expensive than that with the average cost clocking in at
over $50,000 a year.
Those numbers include costs associated with tuition and fees, room and board, books and
supplies, transportation, and other miscellaneous expenses.
Judging by those numbers a four-year degree at a school in your state may set you back
about $100,000.
That’s quite a chunk of change.
Assuming that you put the full cost of that degree on your student loans with a 4.5% interest
rate and the standard 10-year term you would be paying over $1,000 a month after graduation.
That’s also quite a chunk of change.
In fact, it’s about 20% of the median income for those with bachelor’s degrees.
John isn’t sure of what he wants to do for work, but he’s been told that you need to
get a college education to make it in today’s job market so he goes to school.
He pays about $25,000 a year for his education and winds up $100,000 in debt by the time
he’s wearing the cap and gown on graduation day.
He’s now 23 years old and gets a job earning $60,000.
He lowers his tax bill as much as possible by investing in his 401K and IRA.
After taxes, this would look suspiciously like $4,200 a month.
Not including the student loans he lives on $2,000 a month.
Since his student loans are costing him $1,000 a month, his total expenses are $3,000 a month.
Therefore, John has about $1,200 a month left over to invest.
At an average 8% rate of return, John would have $217,000 to his name when his student
loans would finally be paid off at the age of 33.
This is certainly not bad and with his student loans now gone, he will be able to start aggressively
saving for his financial future.
However, similar success can be achieved without a degree.
Jane also wasn’t sure what she wanted to do for work, but unlike John, she decided
to not pay for college unless she had a good idea of what she wanted to do.
She found a job at 18 making $36,000 a year and just like John investing in her 401K and
IRA to lower her tax bill as much as possible.
After taxes, she takes home about $2,550 a month.
She lives on $2,000 a month just like John.
She invests her leftover cash and has a net worth of $167,000 at the age of 33.
If Jane continued to invest like this she would reach financial independence at the
age of 45.
That is a little later than John would be based on these numbers but it is still far
earlier than the average person, despite the fact that she’s only got a high school diploma.
Both John and Jane’s situation are good ones to have.
John had an idea of what he was going to school for and was able to make it pay off for himself
in a big way.
Jane didn’t have a reason to go to school so she saved herself from the costs by finding
a good job that didn’t require higher education.
She could, of course, decide to go to college further down the road if she found something
she really wanted to do that had a higher education requirement.
And with a full-time income, it would be much easier for her to save money for the degree
than it would’ve been in her youth.
Bob’s situation is not as good.
Like Jane, he didn’t know what he wanted to do but he’s been told that you need to
get a college education to make it in today’s job market so he goes to school.
He spends three years at college (racking up $75,000 worth of student loans in the process)
but never finds what he’s looking for.
He doesn’t end up getting a degree and settles into a job paying $36,000 just like Jane did.
Like John and Jane, he lives on about $2,000 a month, but unlike Jane, he also has student
loan payments to make.
His payments are about $777 a month.
That eats into the rest of his income and then some so he is not able to invest at all.
Unless something changes he’s just going to go further into debt with time.
And unfortunately for him, student loans are incredibly tough to get rid of even through
bankruptcy.
Ultimately, this is the scenario we want to avoid.
That’s why it is crucial to have an idea of what you’re going to college for.
Your idea may change after you’re there, which is fine, but we don’t want to just
go to college to find our reason for pursuing higher education.
At tens of thousands of dollars a year, that’s just too expensive of a risk to take.
So first thing’s first, try to get an idea of what jobs you might want to do by shadowing
people in the fields you're interested in throughout high school (or earlier if you
have the chance).
If you find that you would love doing a job that doesn't really require a university education
then you have saved yourself tens of thousands of dollars if not more by forgoing the pursuit
of a degree.
If you end up finding a job that does actually require a University degree, then you can
start looking into ways to save on college costs.
This could include many things such as going to a community college to get your two year
degree before transferring to a 4-year University to get your higher degrees, looking for scholarships
or grants, looking for part-time jobs you can do while at school, and saving early in
things like ESA and 529 plans if you have the time among others.
These strategies can make a pretty big difference in the cost of college and the amount of catch-up
work you’ll have to do after graduation.
For example, according to ValuePenguin’s data, the average annual cost of a community
college is just $4,864.
Heh, and I say just $4,800 as if that’s not also a lot, but it significantly cheaper
than the 4-year university.
If you got your two-year degree from the community college it would run you about $9,700.
You could then transfer to a 4-year university and finish your bachelor’s for an additional
$50,000.
In total it would cost about $60,000 compared to going to the 4-year university from the
beginning and shelling out six figures.
ESAs and 529 Plans are both ways to save for educational expenses.
ESA stands for education savings account.
The 529 Plan gets its name from the IRS Code number that it’s based on.
Both the ESA and 529 Plan allows for tax-free growth and withdrawals as long as you are
withdrawing the money for qualifying educational expenses.
While contributions to the ESA are not tax-deductible, they can be withdrawn tax-free for qualifying
primary and secondary expenses as well as college.
You can choose just about any type of investment you want and can contribute $2,000 per child,
per year.
ESAs must have a beneficiary listed and that person must use the money by the age of 30
to avoid any taxes and penalties.
If they aren’t going to use the money before 30 you can transfer it to another beneficiary
as long as they are related to the original beneficiary.
This is really cool because it means that if you’re saving for your kids college and
they end up deciding not to go you can transfer the account to your grandchildren!
However, there are income restrictions with the ESA.
The restrictions begin with incomes between $95,000 and $110,000 for individuals and $190,000
and $220,000 for those who file jointly.
529 Plans are offered by most states and are a little more restrictive with their investing
options than the ESA.
For most states there are a few portfolios that you can choose from when investing your
money and you can reallocate your investments twice a year.
To make up for this the 529 Plans do offer higher contribution limits of $14,000 per
year and the money is still withdrawn tax-free for qualifying expenses.
There is no age limit for those using the money.
So if you’re beneficiary decides they want to go back to school in their forties they’re
free to do so with this money.
Withdrawals can be used for college expenses including tuition, room and board, and textbooks
and supplies.
However, they cannot be used for primary and secondary school expenses like the ESA can.
Unlike the ESA, there are no income restrictions with most 529 Plans.
And finally, just like the ESA, you can transfer from the original beneficiary to someone else
as long as they are related.
With both of these plans, it’s important to consult a financial professional as there
are sometimes some differences in the fine print, but this is generally how the options
look.
But as you can imagine these options can give your son or daughter a massive head-start
when it comes to saving for college.
Assuming an 8% return and that you begin putting money away for your child’s future educational
costs when they’re born you could have an ESA valued at over $80,000 by the time they’re
18.
This could grow to as much as $120,000 by the time their graduate college.
The 529 Plan, due to it’s higher contribution limits could be a great way to play some catch-up
if you are starting later on in the game.
At $14,000 a year, you could put away over $110,000 in as little as 6 years assuming
an 8% average annual return.
However, if neither of these strategies work for you there are still other options such
as summer work.
It’s great to be able to work during the summer to earn money to pay for school.
If that’s not enough though, there’s no shame in working part-time during the school
year as well.
Your 30-year-old self will thank you for it someday.
Consider if you went to a community college to get your two-year degree.
It costs you approximately $10,000.
If you then went to finish your bachelor’s at a 4-year school you’d be paying about
$50,000.
In total your educational expenses are around $60,000 over the course of 4 years.
If you worked a full-time job in the summer (13 weeks) that pays $12 an hour you would
earn about $6,240.
If you also worked 20 hours per week during the school year (39 weeks) you would earn
an additional $9,360.
In total, you would have an income of $15,600.
After taxes, this would likely be about $14,000 a year in income.
With $15,000 a year in educational expenses that would nearly pay for your entire degree!
Within a few months of graduation, you could be debt-free and off to the races building
your investing portfolio.
This may not help you save for college early, but it will certainly help limit the damage
excessive student loan debt can do to your financial picture going forward.
So those are some strategies for saving and paying for college.
Have you used any of them to help pay for your or your children’s education?
If not, what strategies did you use?
Let me know in the comments section below.