How Much Money To Set Aside Each Month for College
As a parent, you want your child to have a bright future, so you’re trying to create a plan to save for their college education. You can get started by setting a clear goal of the financial support you want to offer your children for their college education, said Andrew Dressel, CRPC, APMA and financial planner at Abundo Wealth.
“If you want to provide four years of a private school, that is great,” Dressel said. “If it is two years of public college, that’s great as well. The important thing is to know what you’re trying to achieve, so you can work on saving the right amount of money.”
As a parent of two children himself, Dressel said he understands the burden of saving for your child’s education, along with so many other priorities.
“If your kids are young and you currently are not saving for future college savings now, because you are paying for daycare, that is very normal,” Dressel said. “Once your child transitions to the K-12 program, try to redirect some of the tuition that you were paying for daycare towards their college savings plan.”
When possible though, Dan Herron, CFP, CPA, PFS and principal at Elemental Wealth Advisors, recommends starting to set money aside as early as possible.
“Let compound interest have more room to be the eighth wonder of the world,” he said. “While little contributions don’t seem (like) much, they do add up over time.”
Consider following the one-third rule of thumb — one-third savings, one-third student debt or merit scholarships, one-third parent cash flow or need-based aid –when deciding how much to save, said Mark Struthers CFA, CFP and founder and financial advisor at Sona Wealth.
For example, if saving for a state school with an average tuition of $30,000 per year, you would generally need to put aside $200 per month, invested at 6.3%, which would equal $80,000 in future dollars over 18 years of savings.
If you’re having trouble saving, Struthers recommends automating your monthly contributions.
“Make sure the budget can handle it, but automation can work for many,” Struthers said. “If that doesn’t work, motivate and have things around that remind you of why you are saving.”
Best Accounts for Education Savings
Herron recommended the accounts below as his top choices for college contributions.
The most popular option, Herron said many clients select 529 plans because it comes with a variety of options and tax advantages.
“A nice feature of 529 plans is that a lot of plans allow you to send out requests for contributions for birthdays, holidays and other important days throughout the year,” he said. “This allows other individuals to contribute to the 529 plan on the beneficiary’s behalf.”
He said families with multiple children can also switch beneficiaries between siblings to take advantage of any unused funds remaining in an account.
This type of account doesn’t fluctuate with the market, Herron said, which will result in little-to-no interest earnings. He said this typically makes it less than ideal for college savings, but it could still be an option.
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“If keeping the account in cash helps you sleep at night, there is something to that,” he said.
UTMA and UGMA Accounts
“I see this used every now and again, especially if parents want to provide a financial resource to the kids once they reach the age of majority,” Herron said. “However, that’s also a drawback of the account as the parents can’t control the account once the kid becomes an adult — age 18 or 21 depending on the state.”
“These accounts also come with annual tax consequences, so you might have to pay tax on the earnings,” he said. Additionally, since it’s treated as a financial asset of the student, he noted it could largely impact financial aid.
Parents could open a brokerage account now to invest money to help pay for college and transfer the account to their child when they reach the age of majority, Herron said. There are a few potential drawbacks to consider though.
“You would pay tax on the earnings every year, and this would count as an asset of the parent for FAFSA, which could impact financial aid,” he said.
No matter what option you choose and how much money you’re able to put aside, feel proud about the fact that you’re giving your children a head start to help with their college expenses.
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