College isn’t getting any cheaper, so the sooner you start saving, the more likely you are to make a dent in your children’s tuition.
By Maurie Backman
There’s a reason 43 million Americans owe a collective $1.3 trillion in student loans. Given the rising price of higher education, many college hopefuls don’t have the money on hand to cover today’s costs. For the 2015-2016 school year, tuition cost an average of $9,410 for a public, four-year, in-state college, $23,893 for a public, four-year, out-of-state school, and $32,405 for a private, nonprofit, four-year college. Mind you, those are just tuition figures; they don’t even include room and board, which are frequently part of the package.
What this means is that if your goal is to pay for your kids’ education, you’ll need to start saving as early as possible. Here are three good reasons to begin putting money aside for college before your children are actually born.
1. You have a limited savings horizon
Unlike retirement, which you conceivably have four decades to save for, if you wait until your kids are born to start saving for college, you’ll have a shorter window of time to build up a sizable education fund. And while you can start out with more aggressive investments in your college fund, like stocks, as you get closer to your children’s 18th birthdays, you’ll need to shift your investments into more conservative options, which typically mean lower returns. Starting early — as in, before your kids are born — gives you a few extra years of savings, but just as importantly, a few extra years to keep that money in riskier but higher-yielding investments.
Let’s say you amass $10,000 in college savings before your first child is born. Because you’d have the option to invest heavily in stocks early on, you’d stand a pretty good chance of averaging an annual return of 8% between the time you start saving and the time you need that money. Even if you’re unable to save anything further for college after having that child, thanks to those high returns and strong start to your college fund, you’d have about $40,000 by the time your child reaches 18.
2. Kids cost a lot of money
You know those parents who complain about how much money their kids cost them? They’re not lying. During the infant stage, you could easily spend $200 a month on diapering supplies alone, and as your kids get older, they’ll need clothing, food, healthcare, and entertainment, the latter of which can sometimes cost just as much as their necessities combined. In other words, there’s a good chance you’ll have less disposable income once kids come into the mix, so it pays to save money while you can.
3. You can capitalize on other people’s generosity
People tend to shower new babies and their parents with gifts. If you already have a college fund set up by the time your child is born, you’ll have a much easier time asking for contributions in lieu of diaper dispensers and cute but completely unnecessary dolls and stuffed animals. All you’ll need to do is point your would-be gift givers toward your future child’s account, sit back, and wait for some extra college money to start rolling in.
While you can always designate a regular old savings account or a traditional (taxable) brokerage account for college, many savers open 529 plans because of the advantages they offer — namely, the ability to grow your money tax-free provided it’s used for college. And since 529 plans are easily transferrable, you can open one in your own name and designate your child as a beneficiary after his or her birth.
If you go the 529 route, you’ll want a plan with a strong performance history and low fees. You might consider Nevada’s Vanguard 529 College Savings Plan and Alaska’s T. Rowe Price College Savings Plan, which, along with the Maryland College Investment Plan and the Utah Educational Savings Plan, earned Morningstar’s highest rating (gold) in 2015. Also high on the list were Virginia’s CollegeAmerica plan, Ohio’s CollegeAdvantage 529 Savings Plan, and the Bright Directions College Savings Program out of Illinois.
Most 529s offer two different investment approaches. The first is an age-based approach, which adjusts your investments to become less risky as the plan beneficiary (your child) approaches college age. This usually means your investments will start out more stock-heavy, but shift to a more conservative mix of bonds and cash over time. The other option is selecting and holding a mix of investments regardless of the plan beneficiary’s age. With this second approach, you can choose your investments based on your goals and appetite for risk.
Paying for college is no easy feat, so the sooner you begin saving, the more options you’ll have for growing your balance. Start early enough, and you just might help your children avoid student debt and the inevitable stress that comes along with it.