Raising kids is expensive, with The Brookings Institution estimating that it costs over $300,000 to bring up a child from birth to 17 years old. And that doesn’t even include the hefty price of college. Setting up a college fund for your kids is a good way to ensure they have a successful future. But how do you save for your child’s college education?
COLLEGE EDUCATION COSTS
According to U.S. News, the average tuition for the 2022-2023 school year ranged from about $10,423 for public in-state colleges to $39,723 for private institutions. If things don’t change, these costs will likely keep going up. College costs have been rising twice as fast as inflation every year, and this trend is expected to continue. If you want to estimate your future college expenses, assuming a steady 6% increase in costs, here’s a look at what you might expect to pay yearly for tuition, fees, room, and board when your child (or grandchild) starts college:
Here are some options to help you start saving for college:
HOW TO FUND YOUR CHILD’S COLLEGE EDUCATION
Saving for your child’s college is a smart move, but it takes planning and commitment. Here are a few steps to help you get started:
START EARLY
The earlier you start saving, the more time your money has to grow. The best time to start a college fund is right after your child is born. With the power of compound interest and consistent contributions, whether monthly or yearly, your savings will have more time to increase. Plus, you won’t have to set aside as much each month to reach your goal.
UNDERSTAND THE COSTS
College costs include several different expenses, some of which might surprise you. By understanding these costs fully, you can compare schools and find ways to lower your expenses. This will help you set a clear savings goal.
CHOOSE THE RIGHT SAVINGS STRATEGY
If you plan to save for college from an early age, look into savings vehicles that can help you invest in your child’s future. Consider tax-advantaged accounts like 529 plans, which offer potential tax benefits and flexibility for education expenses, or Coverdell Education Savings Accounts (ESA).
SET UP AUTOMATIC SAVINGS
Automating your savings makes it easier to grow your college fund. Your savings will increase with each monthly deposit, and compound interest will boost your savings even more. Automating your savings ensures regular contributions and prevents you from spending the money elsewhere.
INVOLVE THE FAMILY
Tell grandparents and other relatives 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 e-invites and mention that contributing to the 529 savings account is an option.
INVEST WISELY
Consider a diverse investment strategy based on your risk tolerance and time frame. Many college savings plans offer a variety of investment options. Regularly review and adjust your investment strategy as needed.
LOOK FOR SCHOLARSHIPS AND FINANCIAL AID
Search for scholarships or financial aid opportunities. While they can’t replace your savings, scholarships can help reduce some of the costs.
WHERE TO INVEST YOUR MONEY
529 SAVINGS PLANS
A 529 savings plan is a great investment option for college. These state-sponsored investment accounts are exclusively for education costs and offer various funds like mutual funds, bond funds, and ETFs. They’re popular for college savings because of their tax benefits: You can contribute up to $15,000 tax-free (for single tax-filers), and your earnings grow tax-free.
TRADITIONAL AND ROTH IRAs
Consider investing in Traditional and Roth IRAs. These tax-advantaged accounts allow you to invest in stocks, bonds, and mutual funds. Within the account, you can choose and adjust investments to meet your needs.
CUSTODIAL ACCOUNTS
UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts let you save money or assets in a trust for a minor. As the trustee, you manage the account until the child reaches adulthood (18 to 21 years old, depending on your state). Once they reach that age, the child can use the money however they choose, not just for education.
IN SUMMARY
College costs are rising, so it’s crucial to start saving early to maximize your investment’s benefits. After deciding how much of your child’s college expenses you’re willing to cover, you can set up a plan for your monthly contributions. You might look into a 529 savings plan, a brokerage account, or a prepaid tuition plan, but a 529 savings plan generally offers the most tax benefits and flexibility.
Remember, every family’s financial situation is different, so your college savings plan should be tailored to your specific needs and circumstances. Regularly review and adjust your strategy as your family and financial situation change.