When Should Parents Start Saving For College?
As seen in Forbes on October 4, 2021
If you ask experts when it makes sense to start saving for college, they tend to agree most families should save as early as they can. This is partly due to the fact college is expensive, but it's also because the cost of higher education seems to go up every year. By saving for college early — and by investing the funds so they grow and compound over time — families can "get ahead" in the college game and take advantage of potential tax benefits offered along the way.
Unfortunately, there are far too many families sitting on the sidelines and not saving, or not saving nearly enough. A 2019 College Savings: Lessons Learned study from Fidelity showed that 42% of parents profiled wished they started saving for college earlier, and 22% wished they had researched more options.
According to Annette VanderLinde, MBA, AIF®, CWS®, Chief Client Officer at Portfolio Solutions, a $1.6B national RIA, this is all pretty common. The advisor says people are prone to assigning too much importance over when to start saving for college.
"Either there’s too much stress placed upon opening a college savings account right after birth, or regret in not starting a savings account earlier," she says. "The key is to just get started and let go of the worry."
Whether your child is an infant or a teen, there is no better time to start saving for college than now. Fortunately, there are plenty of ways to get started wherever you're at — and even if you don't have a lot of extra cash.
Open A 529 College Savings Account
Daniel Milan, managing partner of Cornerstone Financial Services in Michigan, says one of the best ways to save for higher education is with a 529 college savings plan." A 529 account not only gives you the opportunity to invest over the long-term, but also in a more tax favorable manner," he says.
This is because money in a 529 college savings plan is able to grow and compound tax-free over time, then you can use the money in your account for eligible higher education expenses without paying taxes.
Plus, some states offer tax advantages for contributing to an eligible 529 savings plan.
In Indiana, for example, state residents get a 20% tax credit on the first $5,000 they contribute to a 529 plan each year, which works out to up to $1,000 back from the state come tax time.
Make Sure You Invest Your 529 Plan Fund
If you are opening a 529 college savings plan, you should make sure the funds in your plan are appropriately invested so they can grow over time.
The good news is, many 529 plans make it easy for you to invest your money into any number of investment options, including index funds or target date funds that are set up to become more conservative as your child approaches college age.
Financial advisor Julian Schubach of ODI Financial says that, assuming a 7% rate of return, it is possible to double your college savings account every ten years.
"The longer you can let money earmarked for education grow, the better shape you will be in when college starts," he says.
Convert Daycare Expenses To College Savings
Jim Ciprich of RegentAtlantic Capital says opening up a 529 plan and contributing monthly is the best way to get started. However, any amount can leave you dependent better off, so don't be discouraged if you can't commit to saving for college on a monthly basis.
Ciprich also recommends the following strategy for parents who haven't started saving quite yet.
"Divert daycare expenses towards college savings when the child enters kindergarten," he says, adding that daycare expenses easily cost $1,000 per month in his home state of New Jersey.
"Instead of breathing a sigh of relief when that expense ends, consider putting it towards college savings," says the advisor.
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