September is not only time to go back to school, it’s National College Savings Month making it the perfect time to think ahead and take steps toward saving for the kids’ college education. After all, tuition, which has increased faster than the rate of inflation for decades now, is among one the biggest expenses families will ever have—second only to buying a home.
According to The College Board, the national average cost of attending a four-year public college is over $32,000 per year, and the average cost of attending a four-year private college is now over $43,000. If college costs continue climbing at the current rate of close to 8 percent annually, on average, it could cost more than $400,000 to educate a child born today at a private college for four years!
While government grants, scholarships, and tax benefits (like The American Opportunity Credit and the Lifetime Learning Credit) can cut your bill by a third or more, you’re still going to need a plan of attack to help alleviate stress and minimize any remaining out-of-pocket costs.
Consider this: If you save $300/month in a college savings plan for your child beginning at birth and this plans earns an average annual return of 7% (no fees or taxes are assumed), this account will be worth nearly $130,000 by the child’s 18th birthday. If you wait until your child is 10 years old to begin saving, you have to set aside more than twice as much ($670/month) to achieve the same result. It’s a no brainer – the sooner you start saving, the more time you have to grow your child’s college fund through the power of long-term compounding. Here’s a start:
Research college savings plans
A surprising number of parents use general savings accounts to save for college; some even tap into their 401Ks because they aren’t aware of other options. Take the 529 plan, it’s one of the best ways to save for college. Why? Because investments in these plans, run by brokerage or mutual fund companies, grow tax-deferred. Distributions used to pay college costs are free from federal income taxes. Other benefits: 529s have no income limit, and many plans give you a tax credit or deduction for contributions. While you can choose from any state’s options, start by checking your own state’s plans since many states offer residents tax advantages.
Make it a family affair
Remember, any cash gifts can be deposited into a 529 account. So deposit those birthday, confirmation, bar/bat mitzvah, graduation and other miscellaneous cash gifts into the college fund and watch it grow. Every little bit helps, going a long way toward your student’s debt-free, well-educated future.
Begin saving now
It’s never too early to start saving for your child’s education. After all, every dollar you save is a dollar you don’t have to borrow! This is particularly important these days, since graduating seniors can carry an average of $23,186 of student loan debt into their post-college lives. Nineteen percent of borrowers owe more than $50,000 upon graduation!
Automate your savings
Having difficulty saving for higher education despite cutting back on your everyday expenses? Make it easier on yourself by automatically depositing a portion of your paycheck into a designated college savings fund. You won’t miss money that you don’t see.
– Vera Gibbons, Mint Contributor and Personal Finance expert