When it comes to saving for college, there is a ton of information out there. It can be overwhelming, especially considering all of the other responsibilities new parents are enjoying. However, it truly pays (no pun intended) in more ways than one to think and plan ahead for college savings. One of the most significant statistics regarding college savings is that the earlier parents start saving for college, the more likely their child is to attend college and have options to attend the college of their choosing. And of course you want your child to receive a higher education!
The first thing you need to know is that it is never too early to start saving for college, even before your child is born. But let’s look at an example of how saving early can make a big difference. If you start a college savings plan near your child’s birth and deposit $100 per month, your child would have almost $43,000 saved by the time he or she reaches college! But we all know the baby years are a busy and exhausting time, so maybe you don’t get to it until your child is five years old. The same $100 per month now results in only $25,258. This is going to make a huge difference when it comes time to pay the tuition bill. Which brings us to another important point: the ever-increasing cost of tuition.
It is estimated that college tuition is rising 8% annually, and this is compared to an average wage increase of only 3% – startling, isn’t it? In fact, economists predict that in 18 years the total cost of tuition for a private university will have grown by $200,000. Take a look at some statistics, across the board (provided by Fidelity):
Basically, if you expect your child to go to a public college, you should save no less than $48,000. If you have dreams of a private education, plan on saving no less than $107,000 (depending on your income bracket).
By these numbers, you better start saving now. But how much do you need to be saving to reach these goals? Here is a graph that breaks down the percentage of savings you need to reach your goals based on you income (provided by The New York Times):
So, now that you know when to save and how much to save, you need to know where to put that money to make it work for you. One of the best and most popular savings vehicles, with good reason, is a state 529 savings plan.
529 college savings plans have several distinct and almost unbeatable advantages over other investment vehicles (like bonds, savings accounts, insurance, etc.), but their primary benefit is that your interest grows tax free and withdrawals are tax free as long as it’s used for college related expenses. In addition, some states think of it as a 401(k) for your children. We all know about the power of compounded interest.
Another great feature is that anyone can contribute to a 529 plan, including friends and family. And with vehicles like GradSave, an online college savings registry, parents can connect easily via Facebook, e-mail, Twitter, etc with their friends and family for them to also make contributions that go directly to the 529 plan. Friends and family love being able to simply donate to a child’s college savings in such a creative way, instead of another set of clothes, which will probably be tossed aside after a few years, for birthdays and holidays. With research by Sallie Mae showing that 18% of college contributions come from friends and family, tools like GradSave make a huge difference in aggregating college savings with little effort.
So now you know that a 529 plan is the best place to store your savings, it’s time to choose the best plan for your family. With almost every state offering their own 529 plan, it’s easy to see why many parents get confused.
There are over 97 plans nationwide, and the best choice depends on the state in which you reside and pay taxes. For some states like Texas and Florida, which have no state income tax, you can have more flexibility to use any 529 plan nationwide. When shopping for a plan, remember to look at the fees that each plan charges, as that may affect the overall return you can receive throughout the life of your investment. Using a loaded fund with fees (no-load funds have minimal fees) may adversely affect your return. A caveat: there are instances that a loaded fund may make sense, specifically if your financial advisor is helping you make investment decisions.
In many do-it-yourself cases, a no-load fund such as the Vanguard Virginia 529 plan is preferable. The difference in a loaded fund with 5% charge can be very expensive. For example, looking back at the case where you deposit $100 a month from the day your child is born, a load fund with 5% charge would cost you over $2000. For more information on 529 performance, visit savingforcollege.com.
So, to recap, don’t wait to start saving for you child’s college education, because every day and dollar counts! Use special occasions, including your child’s birth, to motivate friends and family to also contribute. Finally, choose the best state’s tax-deductible 529 savings plan to accrue your cash.