Saving For College? Don’t Wait to Get Schooled
Saving for your child’s college education can seem a lot like writing a term paper—putting it off usually doesn’t make it any easier. Parents who’ve put their kids through college and financial experts agree: It’s never too early to begin saving.
Do the Math
As the graph shows, college tuition and fees are projected to go up significantly between now and the time your child is ready to attend. (Keep in mind, this doesn’t even include room, board and other expenses.) That’s why it’s so important to start saving while your child is young. “With the rising costs of higher education, you need your money to grow for as long as possible, because college costs will just continue to rise over time,” says Robert Farrington, founder of The College Investor.
Lesson 1: Start Now
Most parental advice hasn’t changed since you were an undergrad—it pays to buckle down early. The sooner you set a goal and begin saving, the easier it may be on your monthly household budget, advises financial blogger and father Trent Hamm. For example, to accumulate $100,000 by the time your child is ready for college (assuming a 6 percent return), you’ll need to start saving $250 a month as soon as you find out you’re pregnant. If you delay saving until your child is 10, you’ll need to put away $917 each month.
“The earlier you start, the longer you allow the power of compounding to work for you,” adds Farrington.
Lesson 2: Do Your Homework
Many parents compare choosing a college savings strategy to picking a major — sometimes the path is clear-cut and sometimes it’s not. There may not be a cookie-cutter formula for college savings, since your strategy will most likely depend on your personal situation and goals. Also, a little discipline may go a long way, adds Christina Couch, author of Virginia Colleges 101. Instead of buying more toys or fancy clothing over the years, she suggests investing the money in your child’s college fund.
Here are some saving options that have become popular with many parents.
- 529 Plans: For families who share and share alike. These plans are usually sponsored by states. Typically, funds may be used to pay eligible higher education costs, including books, supplies, fees, plus room and board for qualified students. Money may also be shared among qualified family members.
- Coverdell Education Savings Accounts (ESAs): For education starting long before college. ESAs may pay for qualified K-12 in addition to higher education costs including books, supplies, fees, room and board, plus uniforms, transportation and after-school programs.
- U.S. Savings Bonds: For those who want a low-risk way to save. Series EE and Series I bonds may be used to pay tuition and certain fees at eligible colleges and universities as well as vocational or trade schools, including some outside the U.S.
Keep in mind that you may not need to limit yourself to only one savings option. In fact, many financial advisers recommend mixing and matching different types of savings plans whenever possible.
“It’s smart to utilize a few different savings options to prepare for college,” says Kenneth Krantz, Certified Financial Planner and Financial Advisor at Ameriprise Financial. “There are accounts that have to be used for higher education specifically to retain their favorable income tax treatment and other accounts that can be used for multiple goals that aren’t as income tax favorable. Utilizing a combination of funding sources can provide flexibility for building assets down the road for college, retirement and other long-term savings goals.”
NOTE: All of these options may have tax advantages and restrictions. It’s best to check with your financial adviser for details.
Lesson 3: Learn About Loans
In the spirit of a well-rounded education, you should consider all of your options, including student loans. Many parents have walked this road. Like them, you may look for opportunities to learn about your student loan options.
“Most high schools provide college financial aid seminars to help you prepare and learn which loans you can take advantage of. You can also utilize web resources such as studentloans.gov and FinAid.org,” advises Krantz. Your first step, according to FinAid.org, is to see if you qualify for federal student loans. If federal aid isn’t available to you, private student loans may be an option.
Take it from parents who’ve been there: Getting to college often takes as much diligence as getting through college. So do yourself (and your child) a favor, and start saving today. You may end up with enough money to cover an undergrad degree—and even a few late-night pizzas. You’ll be glad you did.
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