In working with families who are planning and saving for college, I stress the importance of being prepared. While college preparation becomes more “urgent” for families with older children, parents whose children are years away from college can benefit greatly from a well-thought-out college savings approach. Research shows that children who have dedicated college savings are three times more likely to attend college and nearly five times more likely to graduate. And as with most goods, people who have money can exercise more choice to select an affordable and desirable college.
As I view saving for college from a financial perspective, here are my top five steps to position your children to be financially able to attend the college they will eventually choose.
Have a goal
College tuition has increased a lot over the last few decades. None of us knows how much anything will cost in six, 12, 18 years. But plenty of tools exist to help plan for college. One is a calculator created by the College Board. Of course, another is Private College 529 Plan, a prepaid tuition plan organized by private colleges. The Plan offers a good planning calculator to estimate future tuition at its hundreds of member schools.
A word of caution. When you see those numbers, take them with a grain of salt. Very few families pay the full posted price, and very few can save the full cost. Most students qualify for some financial aid, especially at private institutions. Every college must have a “net price calculator” on its website. Even with young children it’s a good tool to use. Depending on the college, you might have to pretend your child is starting college next year to test it out. But you can get the idea.
There are many ways to put away money for college. Basic checking or savings accounts. Withdrawals from retirement accounts. Custodial accounts. Brokerage accounts. For most families, though, the most efficient means is a 529 account. Congress created them 25 years ago specifically to help families pay for college. State governments manage all but the previously mentioned Private College 529. While contributions are not federal tax-deductible, most states offer tax deductions for contributions. And if the money is spent on qualified education expenses, the withdrawals are never taxed by federal or state governments. Interest in traditional savings accounts and brokerage accounts is eaten away by taxes. With 529 accounts, a parent is the owner and controls the funds, unlike a custodial account. Whatever you choose, start as early as you can. The longer you save, the more your money earns.
Adjust with the times
Often the first response to a suggestion to save for something is, “I don’t have enough money.” But look for opportunities. Did your toddler just graduate from diapers? Those are expensive! You might earmark some of the former diaper money to college savings. How about when you no longer have expensive daycare costs? Shift some of that expense to college savings. Get a promotion? Tax refund? Inheritance? Those and other events offer opportunities, so use them to your advantage.
Like using payroll deduction for your 401(k) at work, making automatic contributions to your 529 plan is a smart strategy. You are making regular additions to your account in good times and in bad. And the earlier you start, the more your money grows or the more prepaid tuition you build up. You generally can make contributions on a schedule you set up; it doesn’t have to be monthly or biweekly.
Get help from others
With the longtime growth of college tuition, the cost of college has been put beyond the reach of many parents to save for on their own. But most 529 plans help you enlist others with robust platforms that enable you to ask grandparents, aunts, uncles, friends, or anyone to make contributions for the gift of college. These gift platforms are excellent for birthdays, the holiday season, or other milestones. Programs like UGift, UPromise, and Gift of College offer ways others can bolster college savings.
It is clear that college is now an economic good that must be paid for over time. In the end, you can either purchase tuition today and have your concerns about market risks and returns be the colleges’ and universities’ problem, save for a large future purchase over time and personally shoulder market risk and return, or borrow and pay for it after the fact. We encourage you to think about all options, make the choice that best fits your personal situation and revisit on a yearly basis to make any adjustments as needed. Your future self will thank you.
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