March 14, 2022
In this day and age, it seems like college tuition is skyrocketing.
Students and parents are increasingly reliant on loans to cover the cost of higher education, often with devastating long-term results.¹
In this article we’ll cover three saving strategies to help you cover the cost of college without resorting to burdensome debt.
Strategy #1: Use “High-Yield” savings accounts. This strategy is simple—stash a portion of your income each month into a savings account. Then, when the time comes, use what you’ve saved to cover the costs of tuition.
Unfortunately, this strategy is riddled with shortcomings. The interest rates on “high yield” savings accounts are astonishingly low—you’d be hard pressed to find one at 1%.²
Even if you did, it wouldn’t be nearly enough. For example, if you had $3,000 saved for college in a savings account earning 1% interest per year, it would only grow to about $3,100 after four years—not enough to cover a whole semester’s tuition!
Even worse, inflation might increase the cost of tuition at a pace your savings couldn’t keep up with. Your money would actually lose value instead of gain it!
Fortunately, high-yield interest accounts are far from your only option…
Strategy #2: Consider traditional wealth building vehicles. That means mutual funds, Roth IRAs, savings bonds, indexed universal life insurance, and more.
The growth rates on these products are typically significantly higher than what you’d find in a high-yield savings account. You might even find products which allow for tax-free growth (the Roth IRA and IUL, for example).
But, typically, these vehicles have two critical weaknesses…
They’re often designed for retirement. That means you’ll face fees and taxes if you tap into them before a certain age.
They’re often subject to losses. A market upheaval could seriously impact your college savings.
Note that none of these vehicles are identical. They all have strengths and weaknesses. Consult with a licensed and qualified financial professional before you begin saving for college with any of these tools.
Strategy #3: Use education-specific saving vehicles. The classic example of these is the 529 plan.
The 529 is specifically designed for the purpose of saving and paying for education. That’s why it offers…
- Tax advantages
- Potential for compounding growth
- Unlimited contributions
It’s a powerful tool for growing the wealth needed to help cover the rising costs of college.
The caveat with the 529 is that it’s subject to losses. It’s also very narrow in its usefulness—if your child decides not to pursue higher education, you’ll face a penalty to use the funds for something non-education related.
So which strategy should you choose? That’s something you and your financial professional will need to discuss. They can help you evaluate your current situation, your goals, and which strategy will help you close the gap between the two!
Market performance is based on many factors and cannot be predicted. This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Any examples used in this article are hypothetical. Before investing or enacting a savings or retirement strategy, seek the advice of a licensed and qualified financial professional, accountant, and/or tax expert to discuss your options.
¹ “Student Loan Debt: 2020 Statistics and Outlook,” Daniel Kurt, Investopedia, Jul 27, 2021, https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007
² “Best high-yield savings accounts in August 2021,” Matthew Goldberg, Bankrate, Aug 25, 2021, https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/