It’s Not Too Late to Save for College: How to Get Started
Time flies when you’re a parent. One day you’re bringing a baby to day care and the next, you’re picking up a young child from preschool and listening to how he’s learned to write his own name.
Perhaps you’ve started thinking about how you’re going to pay for your children’s college educations. Higher education is an important, yet expensive, investment. According to the College Savings Plans Network, the costs of attending college are increasing approximately twice as much as inflation each year, and over the past decade, tuition and fees at four-year public colleges have increased by more than 50 percent.
Now for the good news: Even if you didn’t start a 529 plan when your kids were born, there’s still hope! With some strategic planning and a lot of dedication, you can provide for your kids, so they won’t face insurmountable debt after they leave college. Read on for some pointers on how to save.
How Much Will My Child Need?
What will the cost of college be more than a decade from now, when your little one is all grown up? There are tools available to you help you get an estimate. CNN Money’s helpful tool, titled “How much will that college really cost?“, lets you search for annual tuition costs by college name or by state. Then, FinAid’s college cost projector allows you to enter the current one-year costs of attending the school of your choice, and takes both rising tuition and inflation into account to provide you with one, two, three and four-year total projected costs.
How Much Should I Save?
Once you have a ballpark figure of how much you’ll need for each child, it’s time to start saving. FinAid advises adhering to the one-third rule: Aim to put away about one-third of each child’s college costs in savings. Then, when it’s time for college, you and your family can use one-third from savings; pay one-third out-of-pocket; and borrow the last third.
Now that you know have a goal to aim for, how do you translate it to into action? FinAid says one rule of thumb is to set aside 10 percent of your salary from the day your child is born. If you wait until he or she enters first grade, you should save 18 percent of your monthly income for your child’s college fund.
One way to start saving is to consider opening a 529 plan for each child. The Internal Revenue Service explains that 529 plans allow you to contribute part of your income without it being subjected to income tax, so long as the money is used for qualified educational expenses.
What Will My Savings Yield?
How much your savings yield, other than the total accrued amount, depends on which savings vehicle you choose. FinAid calculates that putting aside $100 a month from birth to age 17 at a 5 percent interest rate will yield $139,358, for example. Saving $100 a month for the same time period with no interest yields $88,400.
If your children are older when you start saving, you’ll likely need to set aside higher amounts or find a method to earn more interest. Talking to a professional financial advisor can help you determine which options will best fit your needs.
It’s never too late to start saving for your children’s college education. So take the time to educate yourself on your options now so you can make the best decision for your family’s future.
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Non-qualified withdrawals will be subject to taxation, including a possible tax penalty.