Saving for College: By The Numbers
I was proud to send my son off to University of Texas at Austin in the fall of 2015. I have a second son gearing up for his collegiate adventure of choice in the fall of 2017. This time in our lives is a big milestone achievement for my husband and me. It’s been something that we have been planning for the better part of two decades. I can attest 18 years of age sneaks up on a family pretty quickly. Making the most of every opportunity to save is paramount.
Today, according to The College Board, tuition PLUS room and board at a state university is, on average, $19,548 per year. A private university experience is more than double per year on average: $43,921. Also, says the College Board, college costs roughly triple from the time a child is born until the day he/she goes to college.
I encourage my clients to get strategic with their savings from the start. There is an ebb and flow to efficient savings – and your approach should evolve as your child gets older. Here are some ideas as to how you can maximize every moment in the savings cycle…from the day your child is born until the day you pack up the SUV and set the GPS for College Town, USA.
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0-8 years: A 529 Savings Account
All 50 states sponsor at least one kind of 529 plan. This is a tax-advantaged savings plan; there are two kinds to look for. The first is a pre-paid tuition plan, where the saver can purchase units or credits at participating universities and colleges for future tuition. The other, is called a college savings plan and it allows the saver to typically choose among several investment options to which all contributions will be applied. Investment options often include stock mutual funds, bond mutual funds, and money market funds. These portfolios often shift toward more lower-risk investments as the student gets closer to college age.
Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so as long as you use withdrawals for eligible college expenses, such as tuition or room and board, these funds will be available to you without penalty.*
The other thing that I especially appreciate about 529 plans is that other family members or friends, can also regularly (and easily,) contribute to the plan. Moreover, because these funds are hard to access before the college years, they will be protected from use when temptations or emergencies arise before the age of 18.
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8-12 years: Re-Allot Childcare Fees to College Savings
There are many, many expenses during early childhood that are alleviated as your child grows up. Daycare and after-school care can cost families thousands of dollars a month. However, as your child ages, and these funds no longer have to go sponsor childcare, it’s always a good idea to “keep the habit up,” and reallot these funds to your college savings efforts.
Since you’ve been setting this amount aside for years, you won’t necessarily miss the funds as you manage your household. Something as simple as the $100 a weekend that you once spent on babysitters can add up to an (almost) painlessly-earned $5,200 worth of savings. In some cases, that is as much as a half-year of tuition!
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13-18 years: Saving Becomes a Family Affair
School loans often seem abstract to the student who is taking them out. They’re something that will be dealt with later. But later can be a painful reality check for your new graduate – and a tough way to start life as a self-supporting adult.
As your teen gets older, it’s a good idea to start talking with him/her about what kind of college funds you will be able to make available for her college education. This is also a great time to start discussing where the opportunities lie to save more money in the home stretch of the high school years and/or what kind of financial aid they should start to consider.
In Lynn O’Shaughessy’s The Savvy Parents’ Guide to Cutting College Costs, she makes a great point: “Every dollar saved is a dollar less that you have to borrow. Every borrowed dollar will cost about two dollars by the time you repay the debt.” Your teen might think that $1,000 put aside from a summer job will barely make a dent – but when you illustrate how that $1,000 will be $2000 that she won’t have to pay back in 10 years, it becomes clear that even a small amount of savings can make a big difference.
*Withdrawals for purposes other than qualified education expenses may be subject to taxes and penalties.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Please consult with your tax advisor before investing.
Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in mutual funds involves risk, including possible loss of principal. Value will fluctuate with market conditions and may not achieve its investment objective.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.