Child-rearing is costly. Studies show that raising a child from birth to 17 years can exceed $300,000, as per the recent Brookings Institution data. The huge expenditures associated with higher education are yet to be added to this cost. Creating a college fund for your children can be an effective way to prepare them for a successful transition into adulthood. Wondering how to go about saving for your kid’s college fund?
THE TRUE COST OF A COLLEGE EDUCATION
U.S. News’ annual survey reveals that average tuition fees for the 2022-2023 academic year vary from $39,723 (private colleges) to $10,423 (public, in-state colleges). Unless there are changes in education financing methods, these figures are set to escalate. College fees tend to rise approximately twice as fast as the inflation rate each year – a trend likely to persist. Given a steady 6% college cost inflation rate, this is what you may have to set aside for each year of tuition, fees, and accommodation when your children or grandchildren are ready for college:
SAVING FOR YOUR CHILD’S COLLEGE FUND – HOW TO GO ABOUT IT
Planning and determination are important when saving for your children’s college funds. Some practical measures you can take include:
STARTING EARLY
Save as early as you can. The longer your money has to grow, the better. Ideally, consider starting a college fund as soon as your child is born. Regular investments, combined with compound interest over an extended period, means you can invest less each month or year to hit your target.
UNDERSTANDING THE COSTS
A clearer picture of the different costs involved in a college education helps you make better comparisons between schools and find ways to reduce expenses.
CHOOSING THE RIGHT SAVINGS VEHICLE
Choose good savings options that help you save for your child’s future education. Think about tax-advantaged accounts like 529 plans, which can provide potential tax benefits and flexibility for tuition-related costs. Coverdell Education Savings Accounts (ESA) are another great choice.
AUTOMATING SAVINGS
Automatic deposits into your college savings can make your money grow. More deposits mean more savings in the end, thanks to compound interest. It also provides consistency and reduces the temptation to spend the money on other things.
FAMILY CONTRIBUTIONS
Tell your relatives about your college savings goals. They might be willing to contribute on special occasions like birthdays or holidays.
INVESTING WISELY
Consider an investment plan suited to your risk tolerance and investment horizon. As time passes, keep reviewing and re-balancing your investments.
EXPLORE SCHOLARSHIPS AND AID
Stay updated on scholarships and financial aid opportunities. College grants can greatly reduce your costs.
WHERE TO INVEST?
529 SAVINGS PLANS
529 savings plans are state-sponsored and meant exclusively for education-related investments. The money withdrawn is tax-free if used for tuition and other eligible educational costs.
TRADITIONAL AND ROTH IRAS
Invest in Traditional and Roth IRAs, if suitable. An IRA is a tax-advantaged saving account where you can maintain and adjust your investments like stocks, bonds, and mutual funds.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts allow you to set aside funds for a minor child or grandchild. However, at 18 to 21 years (dependent on the state), the child owns the account and can use the money as they wish.
CONCLUDING THOUGHTS
Whilst college costs are surging, early savings mean parents can make more from their investments. It’s crucial to determine what percentage of their child’s college costs parents are willing to cover, enabling them to plan their monthly contributions effectively. The most tax benefits and flexibility are usually offered by a 529 savings plan, but families must take into account their unique financial situations when selecting a savings strategy and adjust it as necessary.
