The cost of bringing up a child is steep. According to the latest data from The Brookings Institution, raising one child from birth to 17 years old costs more than $300,000 on average. This figure doesn’t even consider the hefty costs of tertiary education. Establishing a college fund for your children is often the best way to set them up for a successful future. But how can parents start saving for these funds?
THE EXPENSE OF COLLEGE EDUCATION
Based on an annual survey conducted by U.S. News, the average tuition for the 2022-2023 academic year is $39,723 for private colleges and $10,423 for public, in-state institutions. If trends continue, the cost of higher education will keep rising. College costs usually increase roughly twice as fast as regular inflation, a trend likely to carry on into the future. Here’s a look at what you can expect to pay annually for tuition, fees, and room and board when your children (or grandchildren) are ready for college, assuming college costs inflate steadily at a 6% rate:
If you’re exploring ways to save for college education, consider these options:
SAVING STRATEGIES FOR COLLEGE FUNDS
Saving for your children’s college funds is a smart financial move that requires strategic planning and commitment. Here are some practical steps to consider:
START SAVING EARLY
The sooner you begin saving, the more your money can grow. The optimal time to start a college fund is at your child’s birth. With compound interest coupled with regular monthly or yearly contributions, savings have the opportunity to grow over a long period – meaning less has to be set aside each month or year to meet your savings goal.
GRASP THE EXPENSES
College fees can encompass various things, including some unexpected costs. By comprehending these expenses, you can evaluate different colleges and find ways to mitigate costs, providing a target savings figure.
SELECT THE RIGHT SAVING METHOD
If you aim to start saving for your child’s education from an early age, certain saving methods can help you invest in their future. Consider the tax benefits and versatility of accounts like 529 plans. Another alternative is Coverdell Education Savings Accounts (ESA).
AUTOMATE YOUR SAVINGS
By setting up automatic deposits into your college savings account, you allow your savings to continuously grow. Automating savings also confirms regular contributions and prevents temptation to use the money elsewhere.
REQUEST FAMILY CONTRIBUTIONS
Let grandparents and other family members know about your college savings goals. They may choose to contribute on special occasions. For example, provide a link to your child’s gift page in your digital birthday invitation, suggesting a contribution to the 529 savings account as a gift option.
WISE INVESTMENT
Adopt a diversified investment strategy attuned to your risk boundaries and timeline. Many college saving plans offer a diverse range of investment options. Regularly revisit and tweak your investment plan as necessary.
INVESTIGATE SCHOLARSHIPS AND AID
Stay vigilant for potential scholarships or financial aid. These avenues of funding won’t replace your savings, but they can alleviate some of the expenses.
WHERE TO INVEST YOUR FUNDS?
529 SAVINGS PLANS
Consider opening a 529 savings plan or a state-sponsored investment account specifically designed for education investment. These plans offer individuals the ability to withdraw money for college, K-12 tuition, and other qualified expenses without paying income tax on any returns.
IRAS
Also consider investing in Traditional and ROTH IRAs, which are tax-advantaged savings accounts where you can house stocks, bonds, and mutual funds.
CUSTODIAL ACCOUNTS
Accounts such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to set funds or assets in trust for a minor. As the trustee, you manage the account until the child reaches the age of majority (18 to 21 years, based on your state). However, once the child reaches that age, they own the account and its usage is unrestricted.
CONCLUSION
While the cost of higher education keeps rising, parents can mitigate this by beginning to save early, maximizing investment returns. Once parents determine the extent of their financial support for their child’s education, they can establish a plan for their monthly contributions.
Investing in approaches such as 529 savings plans, brokerage accounts, or prepaid tuition plans can offer benefits, with 529 plans typically providing the best tax benefits and flexibility.
Each family’s financial situation is distinct, so it’s crucial to tailor your college fund saving plan to your unique needs and circumstances. Regularly review and modify your strategy as your family expands and your financial situation evolves.
