As featured in the Finances FYI section of the the Seattle Times
By 1st Security Bank
Have you ever heard the old saying, “You can’t start saving for your kids’ college education too early”? Unlike a lot of old sayings, this one is absolutely true.
As soon as you bring that little bundle of joy home from the hospital, you should be thinking about how to save the bundle they may need about 18 years later.
College can be a crushing expense for students and their families — especially at four-year schools.
In the 2018-19 academic year, annual tuition, fees, room and board at four-year universities and colleges in the U.S. averaged $21,370 at public schools for in-state students, $37,430 at public institutions for out-of-state students, and $48,510 at private nonprofit colleges, according to a report from the College Board. There are dozens of schools nationwide where a student is on the hook for more than $75,000 a year.
And you can expect those costs to grow as your child gets closer to college age. Average four-year college expenses have doubled since 2002, a much faster rate of increase than the cost of living, federal figures show. A child born today may see college costs two or three times higher by the time they enroll.
So, parents should get started saving early — the earlier, the better. Some parents even start saving before their child is born. But how to start? Here are some tips.
Set a target amount.
Determine the fund you want to have by the time your child is ready for college. It may be unrealistic to save enough to cover all college costs, so consider a target of half or a third of what you expect the total tab to be. The rest can be paid in real-time by the student and/or parents and relatives, and student loans or scholarships may come into play. Bottom line: Any money saved is better than no money saved.
Establish a separate college fund.
It’ll be easier for you to keep your hands off the money if it’s not mixed in with another account.
Decide on an amount you can afford to set aside on a regular basis.
If you’re young and you expect your income to rise over time, you might want to save modestly now and increase what you set aside each time you get a raise. But start now and get in the habit of saving; you may find you can live without the money more easily than you thought.
Decide on how frequently you’ll transfer money to the college account, and stick with it.
You might time your transfers to how often you get paid: monthly, twice a month, or whatever works best for you. Frequent, smaller transfers might be easier for you to handle than larger, less-frequent deposits.
Set up an automatic transfer from your bank account to the college fund.
Don’t trust yourself to make the transfers manually — you might “forget,” deliberately or otherwise.
Decide how much investment risk you can tolerate.
A traditional bank savings account will spare you any risk, but your contributed money will earn less than the inflation rate. On the other hand, investing heavily in stocks could boost your earnings but also expose your account to losses. Consider a mix of investments at first and then scale back on stocks as college age approaches.
Look into a 529 education savings plan.
Money in a 529 plan can be spent tax-free on a variety of qualifying education expenses (otherwise, you’ll pay tax and possibly a 10% penalty). Also, many states offer a break on state income tax for contributions to certain 529 plans; check with your state for details. Caution: The features of 529 plans vary widely, so make sure you understand the fees, investment choices, and tax-break eligibility.
Many families may also want to consider a prepaid tuition plan — often a special form of a 529 plan. These plans generally let you lock in future tuition at today’s prices. But only a handful of states offer them for their public colleges, and your child generally must attend an in-state school. There is a separate national plan that covers some 300 private universities. Again, make sure you understand the costs, rules, and risks — and what happens if your child attends a nonparticipating college.
Consider buying a U.S. savings bond.
Buying U.S. Savings Bonds is a time-honored, low-risk way to save for college, and you may get tax benefits if you cash out Series EE or Series I bonds to pay for education costs.
You might also be able to use other kinds of accounts to save for college, including a Coverdell education savings account (although contributions are limited to $2,000 a year) or a Roth IRA. Some of these tools may impact your child’s future eligibility for financial aid, so consult a financial or tax adviser.