According to BabyCenter, September is the month when most babies are born, followed closely by August, June and July. With new parents worrying about feeding schedules, doctors appointments and adjusting to a sleepless life, events like college might seem distant and unimportant. However, according to the U.S. Census Bureau, college graduates earn an average $1 million more than high school graduates during their careers, making a college education one of the most important things parents can provide.
Experienced parents would also counsel that the next 18 years will go by in a flash and college tuition bills will be looming sooner than you’d think.
The Cost of Borrowing vs. Saving
According to the College Savings Plan Network, by not saving, a family will pay over $145,000 for a $100,000 education. On the other hand, a family that starts saving early will pay approximately $65,000. While not every family will be able to save the entire amount of a college education for their child, every dollar saved will reduce the amount of the student loan debt and ultimately the cost of a higher education.
Start Saving Now
According to the College Board, between the 2003-04 and 2013-14 school years, the average annual rate of increase in inflation-adjusted tuition and fees rose 2.3 percent and 4.2 percent for private nonprofit and public four-year institutions, respectively. Assuming an average annual inflation rate of 5 percent, a college education at a public, in-state, four-year school will cost approximately $200,000, including tuition, fees, room and board for kids born this year.
Patrice Sinclair of Sinclair Wealth Management Group of Raymond James, located in Auburn Hills, Mich., advised, “Start as early as possible, even if it’s a few dollars a week. That will give you more time to grow the investments.” Sinclair prefers 529 plans as an investment vehicle, because “the accounts have high contribution levels, money can be withdrawn free of federal, and in most cases, state tax if used for higher education, and often offer a tax deduction on the contribution, as well.”
What is a 529 Plan?
Named after an Internal Revenue Service code, 529 Plans are specifically geared toward saving for higher education expenses. Money contributed to the plan on behalf of a child or grandchild grows tax-deferred. In addition, withdrawals for qualified education purposes are free from federal income tax.
Jo-Ann MacWilliams-Wolf of the Stroko MacWilliams-Wolf Wealth Management Team of Raymond James, a wealth management specialist located in Farmington Hills, Mich., explained that there are two types of 529 plans, pre-paid tuition plans and savings plans. Each one has it’s own advantages and disadvantages.
Pre-paid tuition plans, or guaranteed savings plans, allow the pre-purchase of tuition credits based on today’s college tuition rates. These plans are run by not-for-profit organizations or states. Performance is generally tied to the rate of inflation of college tuition. These plans, though not entirely risk-free, are not subject to fluctuations in the stock market. However, they limit the student to an institution or state for their higher education goals.
529 saving plans allow parents to contribute to an individual investment account in order to save for a higher education. “Your money is invested in a particular investment portfolio at the time you join the plan, and you take your chances on what your rate of return will be — there are no guarantees,” MacWilliams-Wolf explained. “If your portfolio performs well, you reap the benefits. If it doesn’t, you suffer the losses.”
On the other hand, money from this plan can be used to pay for tuition, fees and living expenses at any institution accredited with the U.S. Department of Education.
Parents should be sure to consult a licensed financial advisor to see what options are available in their state and what fits their budget and investment mindset the best.
Other Tips to Consider
Ann Bartus, a College Resource Specialist at West Bloomfield High School in West Bloomfield, Mich., said her No. 1 tip is having a financial discussion regarding cost with kids before they start looking at different schools. “It’s heartbreaking for a student to select a school and then come home and have a discussion that maybe that school is out of reach,” she said.
MacWilliams-Wolf also recommended engaging kids at an early age and involving them from the start. Taking kids to college campuses as they grow up and talking about saving for college makes the whole process fun and relevant.
Parents should start looking at cost as early as middle school so they can get a handle on how much an education might cost. Even people who went to school as little as 10 years ago might be shocked at how much tuition has gone up.
Although the plan is to save for college, it’s also a good idea to investigate scholarships through websites like Zinch.com, the College Board, and Fastweb. “Kids as young as fifth grade can start earning scholarships for college,” said Lisa Graff, a guidance counselor, also at West Bloomfield High School.
The most important thing is to have a plan and know what the picture for college is going to look like for your kids. Start saving as soon as possible, increase it when you can and review your plan with your advisor on a regular basis. Even if you can’t foot the entire bill, by starting a savings program when your child is born, you’ll have made a dent in the bill that will be coming due in 18 years.
For more information on 529 plans available in your state, check out this comparison at collegesavings.org or look up detailed information regarding investing in 529 plans at the U.S. Securities and Exchange Commission. Remember, as with all investments, understand all of your options first and make decisions on what is best for you and your family.
Photo credit: Phil Scoville