How to Save for Your Child's College Education
According to the College Board, the average cost of tuition for the 2016-2017 school year was $33,480 at private colleges, $9,650 for in-state colleges, and $24,930 for out of state residents attending public universities. What does this mean? A college education is expensive and paying for your child’s will likely be one of the largest financial events in your life. However, if you start planning early and make the right decisions along the way, not only will you be prepared when the time comes, but you could decrease the expense overall.
When should you start saving? It may feel bizarre to plan for your child’s college while they’re still in diapers, but it’s important to start saving as soon as possible. There are several advantages to saving while your baby is still, well, a baby. For example, some savings accounts allow you to invest using an age-based allocation. Age-based plans will start with more aggressive and riskier investments, like stocks. Starting early will give your money a chance to grow more quickly early on due to a higher tolerance for risk, but also build in time to recover if the market doesn’t go in your favor. As the student approaches college age, the account owner can then shift to a more conservative portfolio, more heavily allocated to bonds or cash.
When selecting a savings fund, do your research and be sure to choose the right plan for you and your family. Selecting the wrong one could cost you in avoidable taxes and missed financial aid. A 529 plan is one of the most most common college savings plans. A 529 plan is a specialized education savings account meant for college and other higher-education costs. The plans are usually state-sponsored and offer great tax benefits. With a 529, you can choose between a prepaid tuition plan, which allows parents to lock in today's tuition rates, and a regular education savings plan. UGMAs & UTMAs, Roth IRAs, and Coverdell Education Savings Accounts are other common plans used for college savings. Each plan offers unique advantages & disadvantages. It’s important to examine each carefully and select the one that fits into your lifestyle best.
Once you’ve chosen a plan, determine a savings goal and strategy for reaching that goal. Keep in mind, saving too much money could cause you to miss out on financial aid. Not saving at all could hurt you down the road, as you will still be expected to contribute when a FAFSA, or Free Application for Federal Student Aid, is filled out. Once you have a goal in mind, get in the habit of investing continually. We suggest setting up bi-weekly or automatic transfers from your savings or checking account. Also, whenever you have an unexpected windfall of money like a large tax refund, inheritance, or bonus, immediately take half and put it into the savings fund. In addition, any time an age-related expense, such as daycare or diapers, ends, shift the money that you were spending on them to the college fund.
Lastly, it’s important to note that you should prioritize saving for your retirement over saving for your child’s education. You can receive financial aid for college, but you can’t for retirement. The same goes for saving for emergencies and paying off credit card bills. It may go against your parental instinct to put yourself ahead of your children. However, if you don’t plan for your future, your children will likely be the ones supporting you! That's why it's so crucial to establish a strategy and start saving for college education as early as possible.