How Parents Should Invest Now to Pay for College Later
Whether your kids are babies or teens, some part of you may already be thinking about college–more specifically, how to afford it, especially if you have more than one kid. Thinking about it earlier is a smart move as colleges don’t typically come cheap. Though some kids are lucky to acquire full or partial scholarships, most parents end up footing some or all of the bill themselves. The sooner you start saving for your kids’ college fund, the better, especially if you’re investing it, as that money can accrue interest over time. Here are some tips for how much and what are the best ways to invest your money now to pay for college later.
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Start With a Savings Calculator
Before you can start saving you need to have a sense of your goal. College savings calculators allow you to plug in factors, such as public community college versus private university, and the length of your saving time, to determine how much you’ll need to save.
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Break Down a Monthly Goal
Though the figure might at first overwhelm you, breaking it down into monthly payments will help you budget. The average cost of a four-year public college runs between $37,640 (in-state) and $95,560 (out of state), according to The College Board, and that’s typically less than private universities. If you’re saving for more than one child, you might save with the intent to pay for several years or half of what’s owed, with the expectation that your child might take out student loans, work, or obtain scholarships for what remains.
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Invest in a 529 Plan
The most common and popular form of saving for college is the 529 investment plan. The interest you earn on these accounts is not taxed, which is a major boon for parents. And in some states, you can write off a percentage of your payments from your state taxes. There are no penalties for withdrawing the funds so long as they are used for educational purposes. Drawbacks to these funds are that if you don’t use them for educational purposes you will pay a penalty on any money you take out from them.
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Consider a Roth IRA
If you’re not sure about the 529 plan because there’s a chance your child or children may not want to go to college, or you just don’t like being tied into the restrictions of such a plan, another option is to use a traditional retirement style investment plan like a Roth IRA. Assuming you will be age 59&1/2 or older by the time your child will need these funds, you are legally allowed to take money out of an IRA without penalty for needs including education. The drawback of this kind of account is that you are only allowed to contribute a maximum of $6,000 per year.
Diversify With Bonds
While investment accounts that accrue interest may be the best bet for the long term, it doesn’t hurt to put some money into more of a sure thing, since investment accounts are subject to the fluctuations of the market. The income from a cashed out eligible savings bond is tax-free if used for higher education (not room and board, however), according to U.S. News and World Report. Of course, bonds have a fixed rate that tends to be lower than what you’d earn in other accounts, but at least you can count on it.
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Learn More About Investing
In general, the savvier you can become about investing, the more you can control the ways your investments are managed. Sometimes you might want to invest more aggressively, especially when your kids are younger and you have a long time to go still. When they get closer to college, you may want to be more reserved, so as not to take unnecessary risks.
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Last updated: May 27, 2021