Raising children can put substantial financial strain on families. The Brookings Institution’s recent data shows the total cost for one child from birth to 17 years is over $300,000. This sum doesn’t even encompass the tremendous cost of tertiary education. Creating a college fund could pave the way towards a successful future for your children. But how do you go about financing your child’s college education?
THE REAL COST OF COLLEGE EDUCATION
A recent annual survey by U.S. News indicates the average college tuition for the 2022-2023 academic year ranges from $39,723 (for private colleges) to $10,423 (for public, in-state colleges). If the current trends continue, we can only expect these costs to surge further.
Given the inflation trends where college fee hikes outpace regular inflation twice over each year, we could anticipate this pattern to persist. Basing on a constant 6% college cost inflation rate, below is what you can expect to shell out annually for tuition, fees, and accommodation when your children (or grandchildren) are college-ready:
Here’s a rundown of potential savings plan for your child’s college fund:
STEPS TO SAVE FOR YOUR CHILD’S COLLEGE FUND
Cultivating a college fund for your children necessitates a well-thought-out financial strategy and a commitment to the course. Below are some practical steps to take:
START SOONER, RATHER THAN LATER
The sooner you start saving, the more time your investment has to mature. Ideally, the best time to start a college fund is at the birth of your child. By consistently investing and leveraging compound interest, the funds will accumulate over time. This will obviate the need for substantial monthly or yearly savings to reach your target.
GET A GRASP OF THE COSTS
College expenses can comprise many elements, including some unexpected fees. By comprehending these costs, you can make comparisons across institutions and explore avenues to lower expenses. This data will guide your savings goal.
SELECT THE APPROPRIATE SAVINGS PLATFORM
When contemplating an early start for your child’s college savings, consider opting for savings platforms that can nurture your child’s future educational investment. Tax-advantaged accounts like 529 plans, known for their potential tax benefits and flexibility for education-related expenses, are recommended. Another alternative is Coverdell Education Savings Accounts (ESA).
AUTOMATE YOUR SAVINGS
Establishing automatic transfers to your college fund can automate the growth of your savings. Not only will this practise increase your total savings, but the compound interest will further enhance your total. Promptly instituting automatic savings can optimize account growth and ensure regular contributions while curbing the temptation of diversionary spending.
INSPIRING FAMILY CONTRIBUTIONS
Engage relatives and friends about your college savings objectives. They may be inclined to contribute during birthdays, holidays, or special events. During parties, consider including a note in your digital invitation offering a contribution to the 529 savings account as a potential gift.
INVEST SMARTLY
Based on your risk tolerance and timeline, evaluate a diversified investment strategy. Various investment options are available through many college savings plans. Regularly revisiting and modifying your investment strategy is crucial.
EXPLORE SCHOLARSHIPS AND FINANCIAL AID
Stay informed about potential scholarships or financial aid — free money for college is always welcome. While these opportunities may not substitute your savings, they can indeed ease some of the financial burden.
WHERE TO INVEST YOUR MONEY
529 SAVINGS PLANS
When investing for education, consider opening a 529 savings plan or a state-sponsored investment account devoted to school savings. Money withdrawn from 529 savings plans can be used for college, K-12 tuition, and other qualified education-related expenses tax-free.
529 savings plans encompass a diverse range of funds such as mutual funds, bonds funds, and ETFs. They are frequently recommended for educational investment due to the tax benefits: contributions up to $15,000 (for single taxpayers) are tax-free, and your earnings will grow tax-free as well.
TRADITIONAL AND ROTH IRAS
Thinking about investing in Traditional and ROTH IRAs can also be beneficial. An IRA is a tax-privileged savings account where your stocks, bonds, and mutual funds investments reside. IRAs afford you the flexibility to handpick and refine your venture according to your changing requirements and goals.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that facilitate placing money and/or assets in a trust for a minor. The trustee manages the account until the child attains the majority age (18-21 years, depending on the state). The recipient can then use the funds as they wish; their utilization doesn’t necessarily need to be towards education.
IN SUMMARY
With the skyrocketing cost of college education, the sooner parents begin to save, the more they can gain from their investments. It’s necessary for parents to decide the proportion of their child’s college tuition they’re willing to fund and then draw up a feasible monthly contributions plan. Available options for investing include a 529 savings plan, a brokerage account, or a prepaid tuition plan, but a 529 savings plan tends to offer the most tax benefits and flexibility.
Remember, each family’s financial situation is distinctive, so it’s crucial to design and periodically assess your college fund strategy for your child according to your specific needs and financial capabilities.
