The cost of a college education increases every year, largely unbeknownst to you until you confront the bill. The pile of money you must save is staggering. If you have children, plan for college costs as soon as possible.
Children are costly even before college. Raising a child from birth to 18 runs some $245,000, according to the U.S. Department of Agriculture, varying widely depending on where you live and how much you earn. Estimates for high-income earners in the Northeast, for example, can reach $455,000, with urban areas usually pricier.
These figures are based on housing, food, clothing, health care, education, child care and miscellaneous expenses, including cellphones and computers. The bad news, especially if you’re still in sticker shock: These prices do not include the cost of a college education, which shot up some seven-fold in recent decades and at more than twice the rate of health care costs since 1983.
“The younger the child, the more college is likely to cost,” according to JP Morgan Asset Management, which calculates that the eventual outlay for a newborn’s four-year college education will reach some $424,425 for a private college or $190,767 for a public institution. Either way, such a sum shapes up as one of your family’s largest expenses ever.
Here planning comes in, establishing a goal and determining how much you need to (and can) save for your child’s tuition. More than simple saving, this means creating an investment plan and strategy that can increase growth potential and steadily accumulate more for college. Your biggest advantage for this job outweighs even your paycheck’s size: time.
The sooner you start saving, the more time you enjoy to grow your college fund through long-term compounding. Even the smallest contributions make a difference over many years.
For example, let’s say you still have 15 years to save for your child to attend four years at a public college. Targeting a goal of $194,000 (this leaves a little extra for your kid’s pizza and laundry money) and figuring a conservative return rate of 4 percent annually, with such a lengthy time to save you only need to put away $650 a month.
The right investing vehicle is also significant. A 529 College savings plan, for instance, offers tax-free investing and withdrawals for qualified higher education expenses, according to the Internal Revenue Service. The investments won’t incur capital gains taxes, increasing available funds when you’ll need them.
Note: Some states do offer tax deductions or credits for contributing to any 529; states also offer different 529 options.
Diversification of investments within the 529 plan, as in most portfolios, helps you to achieve your results without undue risk. If true to history, a balanced stock/bond portfolio delivers higher returns than do straight bonds or cash. Choose a fund that will help your investments outperform the inflation rate of tuition (generally about twice the general inflation rate, the latter right now at slightly less than 2 percent).
Two more, very cautionary notes: Don’t forget to examine all the fees and expenses associated with a 529, such as asset-based fees (a sort of retainer scaled on the size of your investment), enrollment or maintenance fees and sales commissions to the fund managers. And do not forsake saving for your retirement to save your children’s college expenses.
You and your kids can get student loans much easier than you can borrow money to fund your golden years.