Raising children is costly. The Brookings Institution’s recent data suggests that the average cost to raise a child until the age of 17 is over $300,000. And this figure doesn’t include the significant expenditure associated with postsecondary education. Establishing a college fund for your kids can be a strategic approach to preparing them for a successful future. So, how do you go about saving for your child’s college fund?
THE PRICE OF A COLLEGE EDUCATION
U.S. News’ annual survey reveals that for the 2022-2023 academic year, average tuition rates ranged from $39,723 at private colleges to $10,423 at public, in-state colleges. Barring any major changes in payment methods, it seems that these costs are on the incline.
Given that college expenses inflate around twice the inflation rate annually, college costs are expected to persistently increase. With a steady 6% college cost inflation rate, here’s what you could expect to shell out yearly for tuition, fees, and accommodation by the time your kids or grandkids are of college age:
SAVING FOR YOUR CHILD’S COLLEGE FUND: STRATEGIES TO CONSIDER
Planning and saving for your child’s college fund is prudent and demands commitment and well-conceived strategies. Here are some practical steps that you can follow:
STARTING EARLY
Starting as early as birth gives your savings the maximum time to accumulate. Regular investments coupled with the effect of compound interest over a prolonged period render substantial growth in a college fund.
UNDERSTANDING THE EXPENSES
College’s expenses can cover a wide range of things, some of which might surprise you. Knowing what these costs are can help you decide on the amount you need to save and compare options to keep expenses low.
SELECTING THE RIGHT SAVINGS PLAN
529 plans or Coverdell Education Savings Accounts (ESA) are two prominent education-specific saving strategies that come with potential tax advantages and flexibility for educational expenses.
SAVING AUTOMATEDLY
Establishing automatic deposits into your college savings account contributes to consistent, steady growth of your savings. This method ensures regular contributions and reduces the likelihood of the money being used elsewhere.
COLLABORATING WITH FAMILY
Let relatives in on your college savings plan. Chances are, they’ll be open to contributing during birthdays, holidays, or other special occasions.
MAKING SMART INVESTMENTS
Consider an investment plan that mitigates your risk while maximizing returns based on your time frame. You should regularly review and modify your investment strategy as circumstances change.
INVESTIGATING SCHOLARSHIPS AND FINANCIAL AID
Keep tabs on scholarships or financial aid opportunities, as these can help reduce some costs.
CHOOSING WHERE TO INVEST YOUR MONEY
529 SAVINGS PLANS
A 529 savings plan is a state-sponsored investment account that can be used exclusively for educational investments. It offers tax-free returns when the money is used for college or K-12 tuition and other qualifying educational expenses.
TRADITIONAL AND ROTH IRAS
Consider investing in a Traditional or Roth IRAs, investment plans that offer tax benefits.
CUSTODIAL ACCOUNTS
Another investment route could be through Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act accounts. These custodial accounts let you save money or assets for a minor child or grandchild, with the account becoming the child’s possession once they reach the age of majority (18 to 21 years depending on your state).
CONCLUSION
The cost of college is on the rise, making it crucial for parents to start their savings as early as possible. After deciding how much of their child’s college expenses they are willing to cover, they can establish their monthly contributions plan. 529 savings plans, brokerage accounts or prepaid tuition plans are some alternatives, with 529 plans providing maximum tax benefits and flexibility.
Each family’s financial situation is unique, which means your strategy to save for your child’s college fund should be customized to your specific needs and circumstances. As your family and financial status evolve, reviewing and adjusting your strategy periodically is suggested.
