Bringing up children has a considerable cost. On average, the monetary expenditure involved in raising a child from birth until they turn 17 stands at more than $300,000, as per the most recent data from The Brookings Institution. This figure doesn’t even include the substantial cost of tertiary education. Generally, having a college fund for your children paves the way for their successful transition into adulthood. Are you wondering about how to fund your child’s college education?
THE PRICE TAG OF HIGHER EDUCATION
An annual survey conducted by U.S. News reveals that the typical tuition fee for the 2022-2023 academic year fluctuates from $39,723 (in private colleges) to $10,423 (in public, in-state colleges). Further, unless there are reformations in the means of funding education, the costs of attending a college are projected to keep escalating.
Annually, the costs associated with college education tend to rise twice as fast as the rate of inflation. This pattern is anticipated to persist in the foreseeable future. Here is a projection of the amount you may have to pay for each year of tuition, other fees, and accommodation by the time your children (or grandchildren) are set to move to college (assuming a steady tuition inflation rate of 6%):
Exploring options on how to save up for the cost of college education? Here are some approaches you could consider:
HOW TO FUND YOUR CHILD’S COLLEGE EDUCATION
Making savings towards your children’s college funds is a prudent financial decision that demands thorough planning and commitment. Here are a few practical measures you can adopt:
MAKE AN EARLY START
Initiating your savings early enhances the growth of your money over time. Ideally, the best time to create a college fund is the birth of your child. With the effect of compound interest and consistent monthly or yearly contributions, the funds have a better chance to grow over an extended period. Consequently, you won’t have to set aside a significant amount each month or year to reach your desired amount of savings.
COMPREHEND THE COSTS
The cost of college includes a range of items, including a few that you may not anticipate. By understanding these costs, you can compare different colleges and discover ways to reduce your expenditure, providing you with a target savings figure.
SELECT THE APPROPRIATE SAVING METHOD
If you plan to start college saving for your child early, these saving avenues can assist you in investing towards your child’s future education. Consider tax-advantaged accounts like 529 plans, which offer potential tax benefits and versatility for education-related expenses. Coverdell Education Savings Accounts (ESA) also offer an alternative worth considering.
AUTOMATIC SAVINGS
Implementing automatic deposits into your college saving account will help you amass savings. Each successive deposit swells up your total savings amount, and the benefit of compound interest boosts your savings further. An automatic saving set-up not only allows your account to grow to its maximum potential but also assures steady contributions and reduces the urge to spend the money elsewhere.
INVITE FAMILY CONTRIBUTIONS
Let grandparents and other family members in on your college savings goals. They may willingly chip in for celebrations like birthdays, holidays, and other special events. Consider including the link to your child’s gift page in your digital party invitation and proposing, through a brief message, contributing to the 529 savings account as a possible gift.
INVEST WISELY
Take into account a diversified investment strategy that aligns with your risk tolerance and investment duration. Many college savings plans provide an array of investment choices. Regularly evaluate and modify your investment strategy as required.
CONSIDER SCHOLARSHIPS AND FINANCIAL AID
Be alert to potential scholarships or financial aid opportunities. Receiving a college grant translates to free money. Although these won’t be a substitute for your savings, they can certainly help cover a portion of the costs.
WHERE SHOULD YOU INVEST?
529 SAVINGS PLANS
If you’re planning on investing for college, you may want to look into a 529 savings plan or a locally sponsored investment account specifically meant for education expenses. Proceeds from 529 savings plans can be withdrawn to pay for college and K-12 tuition and other qualified educational expenses without being taxed on any investment gains.
A 529 savings plan includes several different funds, such as mutual funds, bonds funds, and ETFs. They’re generally suggested for college investing, owing to the tax advantages they offer. You can contribute up to $15,000 tax-free (for single tax-filers) and your earnings grow tax-free.
TRADITIONAL AND ROTH IRAS
You could also ponder over investing your cash in Traditional and Roth IRAs. An IRA is a tax-advantaged savings account that can include investments such as stocks, bonds, and mutual funds. These investments in the account are flexible, and they can be tailored as your goals and needs evolve.
CUSTODIAL ACCOUNTS
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) enable you to set aside money and/or assets in trust for a minor child or grandchild. As the trustee, you manage the account until the child reaches the age of majority (18 to 21 years of age, depending on state). Once that age is attained, they’ll have full access to the money and can spend it as they wish, meaning it doesn’t necessarily have to be used for educational costs.
SUMMARY
Despite the escalating pace at which college costs are rising, parents should kick off their savings as soon as possible to maximize their investment returns. Parents must decide what fraction of their child’s college education they can afford, which will help structure a plan for their regular contributions. They can opt for a 529 savings plan, a brokerage account, or a prepaid tuition plan, though a 529 savings plan would likely offer the most tax benefits and flexibility.
Keep in mind that every family’s financial scenario is unique, making it vital to customize your college savings plan according to your specific needs and situation. A periodic review and adjustment of your strategy as your family expands and your financial situation shifts is highly recommended.
