College savings

Before you start saving money towards your education, it’s important to have a clear plan and well-defined goals. Use the following to figure out how much you need to save:

1. Decide on a type of school. Options may include community college, university (public or private), or trade/technical school.
2. Estimate future costs. You don’t have to know the exact amount but try to estimate the total cost of attendance. This may include tuition and fees, housing, books and supplies, and other expenses.
3. Set a savings goal. Based on the estimated costs, start working toward that goal.

Don’t worry if you haven’t saved enough money to cover the entire cost of school.

The 1/3 Rule is based on the idea that people rarely pay for a major expense in one big lump sum. Rather, they spread out the costs over time by combining savings and debt with current income.

1/3 of the cost might come from past income (savings), 1/3 from current income and 1/3 from future income (loans). 

Paying for college may seem overwhelming, but it doesn’t have to be. It just takes planning! Consider the following ways to invest (using money to try to make a profit or produce income), with a plan to use the funds for future education:

Mutual funds are pools of money managed by a financial advisor or bank investment specialist. Earnings depend on mutual fund performance.

• Pros: you can spend the funds on anything and there is no limit to how much you can invest
• Cons: earnings are subject to yearly income taxes and mutual funds may impact your financial aid eligibility

U.S. savings bonds are issued by the Department of Treasury. Since the money is assured by the government, savings bonds are seen as low risk.

• Pros: savings bonds are federally tax-deferred (purchasers are allowed to postpone paying taxes)
• Cons: the maximum investment allowed is $10,000 per year, per type of bond, and if earnings aren’t spent on tuition and fees, interest earned will be included in federal income and subject to tax

A 529 plan is an education savings account that offers federal, and some state tax benefits when funds are used for college. Explore the Texas College Savings Plan.

• Pros: earnings and withdrawals are completely tax free when you use the money for college
• Cons: earnings are subject to income tax and a 10% penalty if the withdrawal is not spent on education

Track your current spending and determine where your money is going. Once you have an idea of your monthly expenses and optional expenses, create a monthly budget. Set a limit on how much you spend on entertainment, shopping, and dining out, for example. Consider each purchase and decide if it’s a “want versus need” and continue adding to savings each month.