Funding Your Child’s College Education is Not Impossible if You Follow These Steps
March 26, 2012This past weekend, I had the opportunity to visit my little two-year-old granddaughter. Since we live out of town, my favorite memory of the weekend was walking into the living room on Sunday morning and the little darling looked up at me in surprise. My step daughter said, “Noni (that’s me) is still here! Isn’t it wonderful?” A big smile and hugs followed. Those are the moments that melt your heart.
We spent the weekend noticing all the brilliant things she did. She knows the ABC song all by herself (except L-M-N-O-P kind of run together) and she has all the animal sounds down pat. She is a little fuzzy on her colors but she does know the moose sound which I didn’t have a clue about myself. Like most grandparents, we think she is not only the most charming but the most brilliant child to ever walk on the planet! She is our first grandchild. (Can you tell?) We adore her and delight in all the things she is learning. Children remind you of the wonder of our world which has become so ordinary to us. Splashing in the bath! Waffles! Taking pictures and then immediately looking at them! Life is a joy with a child.
Well, that was until her dad said, “she is Ivy League material!” then reality set in, (for me at least being a financial planner). Saving for her college will be a challenge – Ivy League or not. According to the College Board, the average in-state tuition for 2011-12 in the U.S. for public institutions averaged $8,244.00. That does not include books, room and board or a cell phone plan (to call her grandparents). In order to pay for JUST THE TUITION, assuming an annual increase of 6% and a rate of return on investments of 4% (to be conservative), her parents would need to start saving $320 per month today.
Funding a college education for your child or grandchild is not an insurmountable goal if you use the right savings vehicles, start early, and get help.
Fund a 529 plan. The biggest advantage of the 529 plan is the tax benefits. Some states such as Connecticut have a state tax deduction for contributions to the 529 plan but the IRS doesn’t. Even if your state doesn’t offer a special break, the IRS allows tax deferred growth in the 529 plan and withdrawals are tax-free if the funds are used for college.
Start now. Even if you can only fund a few dollars a month or put in a small lump sum to get started, don’t wait. In the example I gave above, if the parents waited five years to fund the child’s education, they’d have to save an additional $2,388 per year or over $7,000 more because of the delay. Many 529 plans allow an automatic investment monthly with a minimum investment of $50 per month. Even a minimum contribution helps tremendously.
Invest for the long term. If your child is at least ten years away from attending college, consider choosing one of the equity funds or an age-based portfolio in the college savings plan to get a higher rate of return. Cost of college is rising well past the rate of inflation so returns are important. If volatility concerns you, investigate the “age-based” portfolio in your 529 plan. This type of fund starts out more aggressive when the child is younger and gets more conservative as they get closer to age 18 so the volatility decreases when you need it to.
Get the whole family involved. Once you set up your child’s college account, let everyone know how to make contributions. Give them coupons with the investment company address, the account name and account number. For holidays and birthdays, grandparents, aunts, uncles and friends may want to make a contribution to the plan instead of (or in addition to) a special present. At our recent visit with our granddaughter, the gift that was the biggest hit with our little one was the box of stickers! Fun presents for kids can be very inexpensive and family can add a little something to the college account with the balance –if they want to. They just need to be provided with the chance to do so.
Time flies. I am still shocked that my youngest is graduating from college in a month and I have this sweet little grand-daughter to play with (well, she is two so she is sweet MOST of the time.) The point is time will speed by and pretty soon I’ll be writing a blog about her driver’s education class and how to pay for prom! So remember…save…start early…and save often and of course, enjoy them every step of the way.
Here are some resources:
To estimate your student’s cost of college education: Education Savings Cost Estimator calculator
For everyone planning for college and wanting to understand the 529 plan: www.savingforcollege.com
Kiplinger on the 529 plan (from 2007 but still holds true): http://www.kiplinger.com/magazine/archives/2007/09/529plans.html