If only one thing can be said about raising kids, it’s that the years go by quick! While you are in the middle of the busy day-to-day routines and dealing with never-ending financial pressure, it’s easy to put saving for college on the back burner. But before you know it, you’ll be planning college visits and filling out applications.
Don’t get caught unaware and unprepared for college. Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead. As we celebrate National 529 College Savings Plan Awareness Day, it’s an ideal time to ask yourself this question: Have you started saving for your child’s future education costs? If not, take some time to consider these five steps and create an A+ college plan of your own.
1. Know the Numbers
College tuition gets more expensive every year and the numbers can cause anyone to break out in a sweat. Tuition rates have increased at a faster pace than many other expenses over the past decade and it doesn’t look like they will slow down anytime soon. In the past ten years, college costs have risen an average of 2.4% a year for private schools and 3.5% for public colleges.
The following table shows the average cost for one year of tuition (not including other school costs).
If this upward trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. The costs will vary depending on the institution attended, room and board, and other educational expenses, but either way, that’s a pretty penny for four years of school. For a 2017 graduate, the average student loan balance was over $37,000 (2) and the average monthly student loan payment is $351. (3) For students just beginning their careers, that’s a hefty bill to pay. The substantial cost may seem overwhelming, but knowing what to expect gives you a goal to aim for.
2. Create a Savings Habit
It’s never too late or too early to start saving for your child’s college fund. By starting early, you can reap the rewards of compound interest. (4) If you wait, your account balance may not be as high, but you are still investing something in your child’s future.
Even if you don’t think you have enough room in your budget to add another line item, $25 a month is still $25 more than $0. Setting up automatic contributions is a good way to remind yourself that college is getting closer and your monthly account statement will keep this goal in the forefront of your mind.
3. Weigh Your College Savings Options
The most common method people use to save for college is through a 529 plan. A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. As an added benefit, you are not limited to using the plan offered by the state you live in. However, if you are a Wisconsin resident and contribute to a Wisconsin 529 plan, you are eligible to receive a tax deduction on your Wisconsin state tax return.
Beyond 529 plans, some families use Roth IRAs. Your Roth contributions can be withdrawn at any time and can be used for any purpose. In addition, Roth IRAs can help you avoid the high fees that some 529 plans charge and they also offer virtually unlimited investment options. IRAs will not have any impact on your financial aid eligibility.
For college savings, Roth IRAs aren’t the perfect option, but they do offer an alternative to the traditional 529 plans. Think about opening a 529 plan for college, but also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.
Withdrawals may be subject to penalties, consult your financial and/or tax professional for further guidance.
4. Divide the Cost of College into Thirds
While some people are able to save and pay for the total cost of their child’s college education, most people don’t fit into this category. Instead of letting that fact get you down, break the cost of college into thirds.
The first step is to save before your children head off to college. By starting early and having some help from the markets, you can accumulate a solid base to use for tuition as well as room and board. The next step is to plan on paying for about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, a part-time job for your child or contributions from the family. The final piece is student loans that your child or you can repay after they have completed their education. Since the goal is to minimize student loans, try to maximize the first two parts of this three-pronged strategy first.
5. Monitor Your Investments
Just like your 401(k) plan, you need to monitor your college planning investments. In the early days of saving for college you will want to be more aggressive with your investments, but as college draws closer, the investment allocation should become more conservative, just like a retirement account. It is also helpful to monitor your balances, keep an eye on the changing college costs, and track your progress towards your goal.
If you think a 529 plan might be a good idea for you and your family, we are here to help. We can explain all your 529 plan options and help you decide which is best for your individual college planning needs. If you already have a 529 plan set up, it is important that you have an experienced professional managing the investments in your account. The investment allocation should line up with the age of your child, and the investment risk should be gradually reduced as the child gets closer to college.
Let us help you prepare for the future. With our guidance and experience, you can start saving for your child’s future today to help ease the worries of tomorrow. To get started, schedule a complimentary get-to-know-you appointment online.
As a personal financial advisor at Savaglia Investments and Advising, Tim seeks to assist, empower, and educate his clients along their financial journey. A 2012 graduate of the University of Wisconsin–Whitewater, Tim joined the Savaglia team in 2015 after beginning his career in education and retail management. He is passionate about advising those in his generation about the importance of financial literacy while understanding that each client possess unique needs and goals. Tim is also a Board Member on the South Suburban Chamber of Commerce and will be Vice President of his BNI (Business Network International) chapter for the 2017 - 2018 term. Outside of advising, Tim volunteers his time as a high school soccer coach and is an active basketball official throughout Southeastern Wisconsin. He enjoys spending time with family friends cheering on Wisconsin’s professional and collegiate teams, playing golf, and seeing his favorite bands perform live at Milwaukee’s historic concert venues. Learn more by connecting with Tim on LinkedIn or visiting www.savaglia.com.