If you have children, likely you’ve thought about their future, which may include college.
For many families, saving for college often gets pushed to the back burner because of other financial responsibilities.
However, you don’t want to end up unprepared for your child’s college expenses. And since your child’s education is one of the most important and expensive investments you can make, it pays to plan ahead.
Have you started saving for your child’s education? If not, consider these five beginning steps.
<STEP 1: LEARN THE COSTS OF COLLEGE
College tuition rates have increased at a faster pace than many other items over the past 10 years and it doesn’t look like they will slow anytime soon.
If the trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. Costs will vary depending on the institution, room and board and other educational expenses, but regardless, that’s a lot.
For a 2017 graduate, the average student loan balance is more than $37,000, and the average monthly student loan payment is $351.
For students beginning their careers, that’s a hefty amount. The substantial cost may seem overwhelming, but knowing what to expect gives you a goal to reach.
<STEP 2: START SAVING EACH MONTH
It’s never too late or too early to start saving for your child’s education. By starting early, you can reap the rewards of compound interest. If you wait, your account balance may not be as high, but you’re still investing something in your child’s future.
Even if you don’t think there’s room in your budget for another line item, $25 a month is still $25 more than nothing. Setting up automatic contributions is a good way to remind yourself that college is getting closer, and your monthly account statement will keep this goal top of mind.
<STEP 3: CHOOSE COLLEGE PLANNING SAVINGS VEHICLES
The most common method is a 529 plan, a state-sponsored education savings account that allows earnings to grow on a tax-deferred basis. There are two 529 categories: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you save up to $300,000 per child in many state programs and then use it, tax-free, for qualified education expenses.
An added benefit is you are not limited to using the plan offered by the state where you reside. Some states give a tax credit for using their plan, and, in many cases, it’s of value to shop around.
Beyond 529 plans, families use Roth individual retirement accounts. Roth contributions can be withdrawn at any time and can be used for any purpose.
In addition, Roth IRAs can help avoid the high fees that some 529 plans charge and offer virtually unlimited investment options. And IRAs will not affect financial aid eligibility.
For college savings, Roth IRAs aren’t the perfect option, but they offer an alternative to 529 plans.
Think about a 529 plan for college but also continuing to contribute to a Roth for retirement. It provides extra resources to draw on, if needed.
<STEP 4: DIVIDE THE COST OF COLLEGE
While some are able to save to pay the entire cost of their child’s college education, most cannot. Instead of letting that get you down, break the cost of college into thirds.
The first part is to save before your children head off to college. By starting early and having help from the markets, you can accumulate a solid base to use for tuition and room and board.
Next is to plan to pay about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, part-time jobs for your child and contributions from family.
The final step is student loans that your child or you can repay after college. Since the goal is to minimize student loans, first try to maximize the first two parts of this strategy.
<STEP 5: BE PROACTIVE WITH SAVINGS
Just like your 401k plan, monitor college investments.
In the early days of saving, be more aggressive with investments. As college draws closer, the investment allocation should become more conservative, just like a retirement account.
Also, monitor balances, keep an eye on changing college costs and track progress toward your goal.
Lisa Strohm is founder and CEO of The Athena Network, a financial and life management firm in Upper Saucon Township, providing investment advice and financial planning offered through Good Life Advisors LLC, a registered investment adviser. (The Athena Network and Good Life Advisors are separate entities.) She provides fee-based financial planning and investment management for women, their spouses and extended families. She can be reached at 484-224-3439 or firstname.lastname@example.org.