Bringing up children can be costly, with estimates from The Brookings Institution suggesting the cost of raising a child from birth to 17 years old amounts to over $300,000. This figure doesn’t even factor in the significant cost of higher education. Setting up a college fund for your kids is usually an effective strategy to ensure they become successful adults. Wondering how to go about saving for your child’s college education?
THE EXPENSE OF COLLEGE EDUCATION
The U.S. News annual survey indicates that the average tuition for the 2022-2023 academic year ranged from $39,723 for private institutions to $10,423 for public, in-state colleges. If there are no changes to the way education is funded, these costs are likely to continue spiraling upwards.
College costs have been increasing roughly twice as fast as inflation each year, a pattern that’s projected to carry on indefinitely. Here’s an estimation of the annual costs you might face for tuition, fees, living arrangements and meals when your children (or grandchildren) are set to start their college education (assuming a steady 6% rise in college costs):
Looking to start saving for their college education? Here are some possibilities:
HOW TO FUND YOUR CHILD’S COLLEGE EDUCATION
Saving for your child’s college education is a smart financial move, albeit one that requires careful strategic planning and commitment. Here are some helpful steps to follow:
START ASAP
The sooner you start saving, the more time your savings have to multiply. The optimal time to launch a college fund is right after your child is born. With compound interest and frequent contributions made either monthly or yearly, the funds will have more time to mature. Plus, you won’t need to set aside as much each month or year to achieve your savings target.
COMPREHEND THE EXPENSES
The cost of college incorporates various factors, some of which might surprise you. By fully understanding these costs, you can compare different institutions and explore strategies to lower your expenses. This will help you establish a clear savings goal.
PICK THE BEST SAVINGS STRATEGY
If you’re intending to save for your child’s college education from an early age, use savings vehicles to assist you in investing in their future. Research tax-advantaged accounts like 529 plans, which provide potential tax benefits and flexibility for education-related expenses. Another option to look into is Coverdell Education Savings Accounts (ESA).
SET UP AUTOMATIC SAVINGS
Automating savings into your college fund allows your savings to flourish. Your total savings will expand with each monthly deposit, with compound interest boosting your savings further. Automating your savings nowadays facilitates as much growth as possible in your account besides ensuring regular contributions and avoiding the temptation to spend the money elsewhere.
GET FAMILY INVOLVED
Let grandparents and other relatives know about your college savings goals. They might want to contribute for birthdays, holidays, or other special occasions. For birthdays, include a link to your child’s gift page in your e-invites and briefly explain that gifting to the 529 savings account is a possibility.
INVEST SMARTLY
Think about a diverse investment strategy based on your risk preferences and time frame. Numerous college savings plans feature a variety of investment options. Consistently review and tweak your investment strategy as required.
RESEARCH SCHOLARSHIPS AND FINANCIAL AID
Search for potential scholarships or financial aid opportunities. Scholarships equate to free money and although they can’t replace your savings, they can help alleviate some of the cost burden.
WHERE SHOULD YOU INVEST YOUR MONEY?
529 SAVINGS PLANS
When investing for college, consider establishing a 529 savings plan or a state-sponsored investment account exclusively for school costs. These plans offer different types of funds like mutual funds, bonds funds, and ETFs. They’re typically recommended for college investment due to their tax benefits: You can deposit up to $15,000 tax-free (for single tax-filers) and your earnings will accumulate tax-free.
TRADITIONAL AND ROTH IRAS
You might also entertain the idea of investing your money in Traditional and Roth IRAs. An IRA is a tax-advantaged savings account where you keep investments like stocks, bonds, and mutual funds. Inside the account, you get to choose and tweak the investments as per your needs and goals.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to put money and/or assets in a 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 your state). Once the child reaches that age, they own the account and can use the money in any manner they wish. That means they don’t have to use the money for educational expenses.
TO SUM UP
The price of higher education is skyrocketing. It’s essential for parents to start saving as early as possible to reap greater benefits from their investments.
After determining how much of their child’s college education they’re prepared to pay for, parents can devise a plan for their monthly contributions. They can choose to invest in a 529 savings plan, a brokerage account, or a prepaid tuition plan. However, a 529 savings plan is likely to yield the most tax benefits and flexibility.
It’s important to remember that every family’s financial situation is unique, so the plan to fund your child’s college education must be customized to cater to your particular needs and circumstances. Continually review and modify your strategy as your family evolves and your financial position changes.
