How to Plan for Your Child’s College Fund
Being a parent presents a multitude of challenges. The day-to-day can be stressful enough. When you begin to look at the long-term future for your child, it can be a dizzying thought. Of these, college is certainly at the top of the list.
Like the title says – here are some things to consider when planning for your child’s college fund.
When to Start Planning
There is no better point to start than when they are at an early age.
· You have additional time to implement a savings plan
· You have additional time to set aside discretionary income
· You have additional time to build interest on the savings
The cost of higher education continues to rise across the board.
To examine this rise you can look at previous college inflation rates:
For the 2010/2011 academic year, tuition and fees at four-year public colleges for in-state students averaged 7.9 percent, tuition and fees at four-year public colleges for out-of-state students averaged 6.0 percent, and tuition and fees at four-year private colleges averaged 4.5 percent.
The average tuition cost has seen a 2.9% one-year increase on average for in-state students at a four-year college (as shown by the trend map presented by CollegeBoard.org).
To combat this growing rate in tuition and inflation you should realistically begin planning for your child’s college fund before they are born. Each passing year you fail to start saving is another year you miss out on compound interest.
What to Consider
There are multiple options to begin saving money for your child’s college fund. The amount set aside will be completely dependent on the amount you’re willing (and able) to commit.
Saving $200 a month for ten years at 7% interest would yield $34,818.89. Borrowing the same amount at 6.8% interest with a ten year term would require payments of $400.70 a month. At 8.5% interest the payments increase to $431.70 a month. (If your return on investment is 4% instead of 7%, you’d accumulate $29,548.13. Borrowing this amount at 6.8% interest would entail monthly payments of $340.04; at 8.5% interest the monthly payments would be $366.35. If your return on investment is 10%, you’d accumulate $41,310.40, corresponding to monthly payments of $475.40 at 6.8% and $512.19 at 8.5%.) So if you elect to borrow instead of saving, you will be paying 1.7 to 2.6 times as much per month.
Considering this example, we can see that our best option is to consider an online high interest savings account. Compared to most physical banks, these types of accounts offer a higher interest rate for the savings. They also generally lower the restrictions on what’s needed to start such as minimum balance and initial deposit.
Alternatively, there are options such as a 529 plan which, as stated on the SEC.gov page, “Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board.”
A wise decision is to consider multiple options when saving and explore the market. There are plans with high yields (with appropriate risks) whereas others offer slow, consistent growth.
How to Find Savings
As noted – the earlier you begin saving the more your child will have for college. This also means less of a strain on your budgeting and finances since the savings are stretched out over a long period rather than piled on toward the last few years of their high school experience.
Here are a few ways to find available savings for college goals:
· Live within your means – Configure a budget that allows your family to live below their means so that money is available to go toward savings. Find ways to stay entertained besides shopping, eating out, or becoming consumed by consumerism. Look for long-term “wins” within your household rather than short gains that are generally expensive in comparison.
· Reach out to family & friends – Ask your family and friends to consider helping toward your child’s savings rather than exuberant gifts during their birthday and holidays. Even a little amount from family and friends can amount to a sizeable chunk of the child’s college tuition.
· Pick up a side earner – Begin using your skills and expertise to pick up the occasional odd job for friends, family, and neighbors. Find time to do these activities during the weekend or late at night when you’re free from normal obligations.
· Distill a habit of savings – Talk to your children early on in their lives to distill the importance of savings and proper financial management. Start them with an allowance and share the benefits of waiting to make a purchase. Help them find a job, when they’re ready, and they will have the knowledge and patience for savings that will help, tremendously, with college costs.
The Big Payoff
If you play your cards right you will guarantee security for your child’s education. Remember that the earlier your start the more they will have. Also, explore your options for savings and bunker down on your own habits in spending. The big payoff is well worth it for your child.