Essentially as soon as their child is born, new parents face pressure to begin saving for their college tuition — leaving 18 full years to put money into an account so it can grow. With all the expenses that come from having (and raising) a baby, it can be easy to put college savings off until a day when finances are flowing.
Unfortunately, that day rarely comes. With the average cost of four-year college tuition reaching $9,650 to $33,480 per year in 2016, parents need at least $40,000 by the time your child graduates high school to reasonably afford college tuition as it’s currently priced. That assumes the cost won’t increase at all over the course of two full decades.
The good news is — if you get started early enough — you’ll have the time and ability to put enough money aside.
Here’s what you need to know to prepare for your child’s higher education.
#1. The Dangers of Procrastination
The best motivator for a college savings plan is the consequence of not having one. Without enough to cover it, your child’s education will require student loans. Unfortunately, that debt poses a huge burden to a recent graduate, to the tune of $37,172 per student, as of 2016.
Unfortunately, this $1.3 trillion in national student debt comes at a price. College graduates with loansreport financial struggles, as well as the need to work more than one job after graduation to keep up with their debts. This need to work long hours every daycreates a level of stress that can cause physical and emotional health problems.
#2. Finding the Right Plan
There are many ways to save for college, from standard savings accounts to investments. Butfinancial advisors recommend a 529 savings plan, which is geared specifically toward college education savings. It’s important to realize, though, that not every529 college savings plan is created equal.
The two main types of 529 savings plans are the investment plan and the prepaid tuition plan. Each has its own unique benefits, and there are tools you can use to determine which of the two is right for you. But assuming college tuition costs rise four percent each year and your money appreciates six percent annually, you’ll need to contribute at least $300 a month from birth to pay 65 percent of the cost of a four-year college. This calculator can help you adjust this according to your budget and future plans.
#3. Benefits of a 529 Savings Plan
Although 529 savings is no longer deductible on your federal taxes, many states now allow a limited deduction for participating in state-run 529 plans. Your earnings in your 529 plan will also grow tax-free, with no taxes charged when you take it out to pay for tuition.
One of the most popular benefits of a 529 plan is that the balance can be transferred from one family member to another. If your oldest child gets a scholarship or attends a less expensive school than planned, you can move that savings to one of your younger children’s accounts. This can also apply to spouses, stepchildren, daughters- and sons-in-law, and first cousins.
Whether you have a newborn or your children are already in school, it’s never too late to at least start. By putting money into a 529 college savings plan, you can alleviate some of the burdens when your children reach 18 and begin eagerly waiting for college acceptance letters.