Why You Should Start Saving for College Now
It's never too soon to start saving for your child's college education. We've got expert-approved tips that will help you get started.
The average cost of one year at an in-state public four-year institution is $18,943 (and a whopping $42,419 at a private university), according to The College Board. Ready for the good news? It's easier to save than ever, with a broader range of options: There are now 92 different 529 college-savings plans, and the fees are a lot lower than in the past. "Saving for college is like running a marathon," says Farnoosh Torabi, Moms Money Clinic advisor and host of the So Money podcast. "It's best to prepare as early as possible and keep a steady pace."
Look past the sticker price. After factoring in grants, scholarships, financial aid, and tuition discounts, a family with a median household income of $53,046 typically pays $9,139 per year for a public in-state university and $31,231 for a private one. That's still a hefty chunk of change, but it should make the goal of providing higher education for your child seem a bit more manageable.
Research 529s. These plans are designed to help parents set aside funds for higher-education expenses. You deposit after-tax dollars and invest them in one or more mutual funds within the plan (you can reallocate them once a year). As long as you withdraw the money for qualified education expenses -- including tuition, room, board, books, and lab fees -- you won't be taxed on the earnings.
See how your state's plan stacks up. Many 529s offer generous incentives for in-state residents, including tax deductions and credits, matching programs, and scholarships. But before you commit, use the state-by-state plan comparison tool at collegesavings.org/planComparisonState.aspx. Be sure to look at administration fees (which vary from as little as .14 percent to as much as 1.7 percent), contribution requirements, and historical performance.
Start saving ASAP. If you invest $100 per month in a tax-advantaged 529 when your child is born, you could potentially have $42,000 by the time she leaves for college (assuming a 6 percent return on your investment). If you wait until she's in kindergarten, you'll only accrue $26,000.
Consider a prepaid tuition plan. This college-savings alternative has the same tax advantages as a traditional 529 and is available in 12 states. Prepaid plans are designed to keep up with tuition inflation, so as the cost of college increases, the value of your account does too. Most states allow you to use the money for in-state and out-of-state programs, and for both public and private institutions. However, some states are more restrictive, so do your homework before choosing this option.
Make it automatic. When you enroll in a plan, opt to have contributions deducted directly from your paycheck. Many states let you put in as little as $15 per cycle, though Ellie Kay, Moms Money Clinic advisor and author of Living Rich for Less, recommends that you allocate at least 2 percent of your gross income. Also look for "found" money: Deposit your annual tax refund, invest child-care funds (once your kids are in school), and, if you're paid biweekly, earmark the two "extra" paychecks during the year toward college.
Encourage relatives to pitch in. At holiday time and birthdays, ask loved ones to buy a smaller-than-usual gift and use the rest of what they planned to spend toward your child's 529. "Plans make it simple for other people to donate to your child's account, and grandparents like having a smart, easy gift idea," says Betty Lochner, chair of the executive board of the nonprofit College Savings Plans Network (CSPN). If they prefer, family members can also choose to open a separate 529 account in your child's name.
Be mindful of new education trends. The emergence of massive open online courses (MOOCs) and accredited online curriculums reflects an effort by universities to reach larger numbers of students and trim expenses. The expansion of such programs could make college more accessible and affordable for your child, says Torabi. Since it's impossible to predict how they might evolve during the next 15 years, your best strategy remains the same: Save early, and save big.
Make no mistake. Even if money is tight in your household, don't delay saving for college. "Putting away $50 a week for the next 18 years is much easier than draining your personal savings to pay for tuition later on," says Torabi, who opened a 529 savings plan for her baby last year -- six months before he was born.
$480,000. That's how much more students with a bachelor's degree earn over their lifetime -- even accounting for tuition costs -- than those who don't attend or complete college, according to a paper published by economist David Autor in the journal Science.
Dollars and Sense
Mom Samantha Tsihlis asks: "Should all of our investments toward college go into one place, or are we better off having multiple savings accounts?"
To save for their 1-year-old son Manny's future, Tsihlis and her husband, Dimitri, from Contoocook, New Hampshire, recently opened a 529, a stock-trading account, and a passbook savings account in Manny's name. But the couple isn't sure this diversification was the right move.
Moms Money Clinic advisor Ellie Kay answers: The Tsihlises are doing the right thing. I don't believe in putting all your nest eggs in one basket. While a 529 offers the best tax advantages of any college-savings strategy, they should also consider opening a Uniform Gifts to Minors Act (UGMA) custodial account, which allows parents to manage investments in a child's name until he's 18 or 21 (depending on the state). This may reduce their taxes, since the income is taxed at a kid's lower rate.
Originally published in the June 2015 issue of Parents magazine.