9 Investment Tips for Parents Who Are Setting Up a College Fund
We’d all love to remain in denial where our kids are concerned. We have so much time left. They’ll be my baby forever. They’ll never move away. The hard reality, though, is that we’ve got 18 years from the moment they enter this world until they are technically considered adults themselves. So we wouldn’t find it one bit surprising if you were already looking into setting up a college fund for your progeny’s future education. In fact, we’d say it’s a smart move.
When your child is born, you are flooded with so many feel-good endorphins that the only things on your brain are cute little baby toes and that sweet squishy baby nose. Then you wake up one morning and that tiny bundle is waddling into kindergarten with an oversize backpack, and it hits you: college. Before you know it, your child will be trading times tables for an undergraduate course load. And then it hits you that a college education doesn’t usually come cheap.
If the mere thought of your baby decorating their dorm and pledging a sorority or fraternity makes you want to break out in hives, just breathe. To help lighten your load, we tapped three investment experts to weigh in on tips for parents who are ready to set up a college fund. Here’s what they had to say.
1. Start a 529 college savings plan ASAP
“A 529 college savings plan is the best way of saving for college because 529 plans provide tax and financial aid advantages over other college savings options,” Mark Kantrowitz, publisher and VP of research at Savingforcollege.com, tells SheKnows. Kantrowitz recommends investing after-tax dollars into a 529 plan, noting that earnings accumulated on a tax-deferred basis are totally tax-free if used to pay for qualified education expenses, and the money in a 529 plan is treated favorably by financial aid formulas.
Plus, there may be additional tax perks. “Almost three dozen states offer income tax deductions for contributions to the state’s 529 plan. So, you should consider your state's 529 plan(s). You should also consider the 529 plans of states with low fees — under 1 percent — since minimizing costs is the key to maximizing net returns,” says Kantrowitz.
2. Think incrementally
College Aid Planners' Joe Orsolini likens college savings to a marathon. “You can’t go out and think you are going to complete 26.2 miles without a little practice. You have to build up, run around the block, do a 5K, etc.,” he tells SheKnows, suggesting that parents should start saving in small amounts and increase the amount over time when feasible.
“Saving for college is a lot easier in smaller pieces,” Orsolini advises. “Ultimately, you are going to write checks. Do you want to write a lot of small ones along the way or a big one when college starts? Slow and steady wins the race when saving for college.”
3. There’s no such thing as too soon
We’ve already established that college is expensive, right? And that if you don’t save a little along the way, you’ll wind up staring down a possibly prohibitive lump sum. For these reasons, Student Debt Warriors founder and editor Tim Stobierski stresses that there’s no time like the present to start saving.
“Start as early as possible, ideally from the day of your child’s birth. Even if you don't currently have a child, you could open a plan in your own name if you plan to have a child in the future, make contributions and allow the money to grow. Then, once your child is born, you can move the plan to their name and Social Security number,” Stobierski tells SheKnows.
4. Shoot for saving at least one-third of tuition
So, how much are we talking here? Well, per Kantrowitz, college costs triple over any 17-year period from birth to college enrollment. Therefore, you should shoot for saving about a third of future college costs.
“Like any major life-cycle expense, the costs will be spread out over time, with a third coming from past income (savings), a third from current income and financial aid and a third from future income (loans),” Kantrowitz explains. “Combine the two rules, and your savings goal should be the full cost of a college education the year the child was born. That's the equivalent of $250 per month for a child born this year who will be enrolling in an in-state public four-year college, $400 per month for an out-of-state public four-year college and $500 per month for a private four-year college.”
5. Get loved ones involved
Stobierski says a great way to get your college fund to add up even more over time is to think outside the box — or rather boxes, as in gifts. Getting family and friends to pitch in provides a practical opportunity to grow those savings.
“One easy way to do this, especially when the kids are younger: forgo expensive parties and gifts (especially for infants and toddlers) and instead funnel the extra funds to their 529 plan. Though parties are fun, your child most likely won't remember them; and I'm willing to bet they'd be happier in the future without student loans than they would be now with another toy,” said Stobierski.
6. Make it automatic
As with many things in life, establishing a routine leads to results that are more consistent. In that regard, Orsolini recommends making savings contributions a habit. And the easiest way to do so is by having it done for you.
“Sign up for a monthly auto-payment plan,” he suggests. Thanks to today’s automated technology, it’s easier than ever to set up monthly transfers from your bank account to go straight into your savings account or 529 plan.
7. Keep an eye on the market
Of course, what you don’t want to do is play it fast and loose with all the money you’ve saved for your child’s college education — and end up taking a major financial hit when the market dips.
Cautions Stobierski, “Remember that investing always involves risk. As your child ages and gets closer and closer to graduating from high school, make sure that your 529 plan becomes more conservative to offset the risk of a market decline. It would be really counterproductive to have saved money all of your child's life just for it to be wiped away right when they need it most.”
8. Plan super-strategically
If you’re just starting to grow your family and you’re a type A when it comes to planning, you might want to consider this particularly interesting tidbit from Kantrowitz: college can actually be more affordable if your children are close in age.
Here’s why. “Financial aid application formulas, such as the one used by the Free Application for Federal Student Aid, divide the parent contribution portion of the expected family contribution by the number of children in college at the same time. So, going from one child in college at a time to two children in college at a time is like dividing the parent income in half,” Kantrowitz elaborates.
9. Realize that your college fund may not be necessary
At least not how you thought it would be, that is. “It’s important for parents to realize college isn’t right for every child, and while parents should encourage education, they should not pressure their child to earn a degree,” Stobierski says, adding this could ultimately lead to a child not graduating and yet still being saddled with expensive debt throughout their life.
This doesn’t mean you still shouldn’t prepare by saving and investing, says Stobierski. If your child decides college isn’t a good fit for them, 529 college savings plan funds can be diverted toward trade or professional school and even transferred to a grandchild or other relative.