Aside from saving for retirement, saving for your child’s college is probably one of the most expensive things you will do if you have kids.
With 5 kids ourselves, saving for their college is one of my personal priorities. College is an expense – and given the fact that 43 million Americans have a collective 1.3 trillion dollars in student loans, there is no doubt that there is room for improvement.
Tuition for some colleges can topple $40,000 per year – potentially even more if you are looking at out of state tuition (California resident attending Arizona State University). If that student stays on that path, without deviating, a 4 year degree will run them at least $160K. In some cases, that cost doesn’t even include room and board – making the cost even more staggering.
Will your children to to college?
As parents, we don’t always know – but it’s definitely worth the effort to plan ahead. Considering most children don’t have a plan for college and rely on financial aid (also known as student loans), I have always taken the direction of starting them off in a way that helps them stay out of debt, not get into debt.
It’s easier to save now than pay later ~ and a few sacrifices early on can make an incredible difference in the future of your child – no matter where they may choose to go after high school. College isn’t getting any cheaper, and the sooner you can start saving the more you can make a dent in your child’s tuition costs.
Here are 3 reasons you may want to consider saving for your child’s college early even before they are born.
You have limited time
When it comes to retirement, you have 40 or more years to save – unless of course you wait until your 30’s or 40’s to get started. If you start saving for retirement at the age of 18, then even better… that time is definitely on your side.
When you start saving for your child’s college fund, you traditionally start out aggressive and move into something more conservative as you reach their 18th birthday. Conservative options will traditionally lead to lower returns – but if you start early before your kids are born, you have a few extra years to put money away. If you start a fund before they are born, you can capitalize on the extra year or two, or even three that you are saving.
Extra time will earn you quite a bit more in those higher yield investments.
Take advantage of gifts
By starting their college fund early, you can take advantage of other people’s generosity in the form of new baby gifts, and early birthdays. Instead of asking your family and friends to buy from your registry, buy the basic items for baby on your own and ask friends and family to contribute to your child’s account.
Your first instinct might be to start a savings account or a CD for your child, but the best route is to open a 529 plan because of the tax advantage – it’ll allow you to grow your money tax free provided it’s used for college.
If you are unsure if a 529 plan is the right avenue for your child (ie. they may not attend college, etc.), you can be reassured that the plan is easily transferrable. Even better, start saving before your child is born by opening the 529 plan in your own name, and then easily placing your child as the beneficiary after they are born.
The expense is always going to be there
By starting a savings plan early, you can help reduce that burden of high debt that they might have from paying for their education. And while not everyone may agree that it’s the parents responsibility, here are some things to keep in mind:
- It’s better to help them start off on the right foot with some advance planning than to see them struggle with debt and loans at a relatively early age.
- It’s cheaper to save now than to loan money later
Early sacrifice and diligence in starting a fund for them even before they are born will give you a start on the right foot – if they decide to attend college, they’ll have a fund in place that won’t require them to start their adulthood by contributing to the already staggering student loan statistics.
And if not, then the funds can easily be used for someone else… not entertaining a college fund (for any reason) is a risk – especially considering the costs of college, and the sheer fact that loans are so readily available.
Sometimes putting away can be daunting – many don’t know where to start, they may assume they can’t afford to put away, or they just need that gentle push to get started.
A 529 plan works similarly to a Roth IRA – you make your contributions with after tax dollars and earnings grow tax free. You will not be taxed at withdrawal as long as the money is spent towards qualified education expenses.
There are two types of 529 plans ~ some 529 plans can buy tuition units (priced on the average of cost at public colleges in their state) and then use those later when the student attends school — in that state (Prepaid Tuition Plans). There is also a 529 College Savings Plan that operates similar to an investment account… that offers investment portfolios that will increase or decrease and are based on the market. That is the type we are referencing in this post today.
Related post: 9 Common Myths about 529 Plans
Both plans allow your contributions to grow federal income tax free – provided the funds are used for qualified higher education expenses. For the investment plan, that covers tuition, fees, room, board, books and even a computer –– IF the school requires the kids to have one.
Your best course of action is to talk to an investment professional to get started so he or she can point you in the right direction to making the best investment possible when it comes to planning for your child(ren) and their future.