With the rising costs of higher education, it's never too early (or too late) to start saving for your child's college tuition. Here, experts share five key ways you can start saving for your child's admission costs now to limit the amount of debt your child graduates with.
A new baby in the house is certainly something to celebrate. This wonderful addition to the family also brings with it some heavy responsibilities for parents for many years to come. Sleep cycles change, babysitters need to be found, and soon enough it’s time for baby to start day care and preschool. Expenses will accompany every milestone a child hits. One of the most costly ones is college.
When you have a newborn or toddler, college seems a world away. But time flies, so it’s never too early to start saving for higher education. “Parents should begin to plan for their children’s education as soon as they are born,” says Nancy Curtin, CFP, CLTC. Another reason to save: Admission costs are likely to increase as the years go by. Today, the average four-year cost for a public university is $101,000 and $167,000 for a private university. In 18 years, the projected average cost for a public college is $184,000 and $303,000 for private, according to Curtin.
With such exorbitant expenses, how exactly should you begin to save? What are some steps to take to ensure college will be paid for?
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Diversify Your Savings
“There are several ways to save, and the best way to go may be to put your college savings in several places,” says Sharon Epperson, CNBC senior personal finance correspondent and host of Retire Well, a digital video series designed to help viewers of all ages manage their money. “Diversify where you save in terms of the type of accounts that you choose and what you invest in.”
Some of these options include 529 plans, Roth IRAs, and high-yield savings accounts. The 529 is one of the most common ways parents start saving for college. It is specifically designed for higher education expenses.
“You put after-tax money into this account, your earnings are not taxed, and you can withdraw the money tax-free to pay for college. Many states will give you a state tax deduction for your contributions,” Epperson says. “Plus, this year there’s an extra perk. Under the new federal tax laws, up to ten thousand dollars a year of your 529 plan money can be used to pay for private school tuition for kindergarten through twelfth grade. Your money in the 529 can be invested in a range of assets based on your child’s age and when they will be going to college.”
Parents who have multiple children may think they need to open a separate 529 plan for each child, but that’s not necessarily the case. Plus, it can be overwhelming for some parents to manage. Epperson suggests parents contribute as much as they can to a 529 plan for their first child. If they wind up not needing all of the money, they can change the beneficiary of the account to another child without any penalties.
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Encourage Good Grades
The 529 plan is a great foundation, but once he starts school, it’s important to start focusing on his academic success, too.
“The reality is that grades and test scores weigh heavily in the scholarship and financial aid process for college,” says Anne Huntington, vice president of Huntington Learning Center. “One way that parents can save for their children’s college education is by investing in their academic and skills progress early.”
Huntington cites how students who attend the learning center achieved higher grades and ultimately received an impressive amount in scholarship funding. “Our individualized test prep programs’ results are tremendous and show that after only three months of tutoring, students on average achieved a 5.2 point increases on the ACT and 238 point increase on the SAT,” she says. “In addition to the point increases, on average, our seniors in the tri-state area last year [each] received over $50,000 in scholarship offers.”
Create a Registry for College Funding
As your child grows, there are other ways to keep the savings going. For example, when arranging birthday parties or other special events, consider asking guests to contribute to your child’s 529 rather than giving a physical gift.
“It may not win best gift on the day of the birthday party, but it sure will come in handy down the road,” says Pete Wylie, vice president of Student Lending at CommonBond, a financial service that refinances graduate and undergraduate loans. There are even websites that allow people to register online to send gifts to 529 accounts, including Ugift529.com, GiftofCollege.com, and LEAF College Savings.
Remember It’s Never Too Late
As important as it is to start saving early, it’s never too late. It might also give you a better idea of what type of education you’re saving for, and whether your child is likely to attend community college, a private institution, or another type of school. If your child knows what kind of career path she wants to take, that can also be helpful in figuring out which school to attend. The most expensive school doesn’t always mean the best education.
“The first step to do is to get some kind of idea as to what college education we’re talking about,” says Douglas Boneparth, a certified financial planner and author of The Millennial Money Fix. “Once you have time and value, there’s any number of college education calculators online. I do this typically during financial planning. You can search to solve for how much you need to save each month, each year to actually achieve that goal.”
There are some other factors to keep in mind within these calculations as you work to fund your child’s education goals, Boneparth adds.
“There [are] a lot of assumptions in there—the return on the money you’re investing, the inflation rate of college education and tuition. But if you’ve quantified it by time and value and have used the calculator and have solved for what it’s going to take every month, you’ll have something here that you can use. You can take that information and plug it into your budget.”
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Make Your Kids Part of the Process
One last tip from the experts is to get your kids involved in college planning early. Talk about school with them, and get them to start saving once they have a job and start earning money.
“Encourage each child to open a Roth IRA when they start earning money. You want to get them in the habit of saving a portion, at least twenty percent, of what they earn,” Epperson says. “Saving more early on will encourage them to keep saving, even if it’s a little less, later. Also, each child can have their own high yield savings account. When you start teaching them to manage their own money, show them the benefits of saving in their own account. Talking about saving can provide some great teachable moments.”