Having children can come with a hefty financial commitment. According to The Brookings Institution, the average cost of raising one child from birth to 17 years old exceeds $300,000 – and that’s excluding the cost of higher education. Establishing an education fund for your child can be a great way to secure their future success. Wondering how to start? Let’s discuss.
THE EXPENSES OF HIGHER EDUCATION
A recent survey by U.S. News highlighted that the average tuition for the 2022-2023 academic year was $39,723 for private colleges and $10,423 for public, in-state institutions. Unless there’s a shift in the education funding paradigm, these costs are likely to continue rising. On average, college expenses inflate approximately twice the general inflation rate every year. So, here’s what you need to know about the annual cost of tuition, fees, and accommodation when it’s time for your child (or grandchild) to start college, assuming an unchanging 6% college cost inflation rate:
And here are some strategies to consider if you are thinking about saving for your child’s college education.
GUIDELINES FOR SAVING FOR CHILDREN’S COLLEGE FUND:
Starting a college fund for your children is a smart move financially and it demands meticulous planning and commitment. Here are some actionable steps:
BEGIN AS SOON AS POSSIBLE:
Start saving soon after your child is born. It offers the benefit of compound interest and regular investments monthly or yearly, allowing your savings to grow over a long duration. You will also need to save less each month or year to meet your saving target.
COMPREHEND THE EXPENSES:
Realize that the cost of college includes several elements, some of which you might not anticipate. Having a clear picture of these costs can help you compare universities and find ways to minimize your expenses. This ultimately leads to a realistic savings target.
SELECT THE RIGHT SAVING PLATFORM:
Try investing in tax-advantaged accounts like 529 plans, which are designed for future educational expenses and provide beneficial tax advantages. Consider Coverdell Education Savings Accounts (ESA) as well.
AUTOMATIC SAVING:
Automation of deposits in your college saving account can help the savings to accumulate over time.
Every monthly deposit adds to your savings pool and compound interest multiplies it further. Automatic savings ensure regular contributions and decrease the temptation to spend money on other things.
INVITING FAMILY CONTRIBUTIONS:
Family members can be told about your saving objectives so they may wish to contribute on birthday celebrations, during holiday seasons or other important events.
WISE INVESTMENTS:
Opt for an investment strategy that is diversified and suits your risk capacity and time frame. College saving plans offer a variety of investing options. Assess and adjust your approach as required.
LOOKING FOR SCHOLARSHIPS AND FINANCIAL AID:
Stay aware of scholarship opportunities as well as financial aid provisions. College grants equate to free money and can help cover some of your costs.
WHERE TO DIRECT YOUR INVESTMENTS:
It’s advisable to think about 529 saving plans. These state-sponsored investment accounts are exclusively for educational purposes. They offer tax advantages and can be used to pay for K-12 and higher education. Another option is to invest in Traditional and Roth IRAs. They can contain assets like stocks, bonds, and mutual funds and the holder gets to choose the investments.
CUSTODIAL ACCOUNTS:
Consider Uniform Gifts to Minors Act (UGMA) accounts or Uniform Transfers to Minors Act (UTMA) accounts. These special trusts allow you to save cash or assets for a minor child or grandchild until they turn 18 to 21 years of age (according to your state law).
THE KEY TAKEAWAY:
College education is becoming increasingly expensive, hence it is crucial that parents begin saving as soon as possible. After determining how much of their child’s education cost they can afford, parents can then plan their regular contributions.
Options like a 529 savings plan, a brokerage account, or a prepaid tuition plan are also available. However, 529 savings plans usually offer the most tax benefits and flexibility.
Every family’s financial circumstances are unique; thus, your saving approach should be adjusted according to your specific needs and evolving family scenario. Keep reviewing and adjusting your strategy as necessary.
