As a parent, figuring out how to save for college can be a daunting task—especially when you consider the rising cost of higher education. According to the College Board, a non-profit organization that helps students prepare for college, the average cost of a private college rose to $30,094 this year, while the cost of a public college rose to $8,893.
With room and board, you can expect to pay even more—$40,917 for a private college and $18,391 for a public college.
If you intend to help your child pay for college, you may want to start saving money while he or she is still young. Over time, that money will grow into a significant amount that can be very helpful when your child reaches college age. The earlier you start saving, the more time that money has to grow.
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How can I get started?
If you don’t have a lot of money to start saving, that’s fine. It’s better to start now rather than later, even if you can only afford to put away $25 or $50 per month.
You may want to check out savingforcollege.com. This website looks at 529 college savings plans, which help families set aside money for future college costs. Almost all states have at least one 529 plan available, and in most cases you aren’t limited to investing only in your state’s 529 plan.
Investing in a 529 savings plan will help reduce your income while allowing you to grow your money tax free as long as it’s used for your child’s college expenses. Plans can differ between states, so be sure to compare different plans to see the tax implications and what the growth rates have been historically.
What if I don’t want to open a 529?
If you want to invest but don’t want to open a 529 plan, consider a Roth IRA in your own name. If you put money into a Roth IRA, you can make early, tax-free withdrawals for your child’s college expenses. A Roth IRA is also a retirement account, so if your child doesn’t attend college, you will be able to keep that money and use it toward your retirement.
If you think you will qualify for scholarship aid under the Free Application for Federal Aid (FAFSA), a Roth IRA in your name may be a better choice than if you were to put that same money into your child’s savings or investment account.
How do I choose where I should put my money?
The investments in a 529 plan are pre-chosen, age-based funds. When your child is young, the investments will be aggressive. As your child gets older and closer to college age, the investments get less aggressive.
If you choose to go with a Roth IRA, you have similar options. You can choose a target date or age-based fund that matures in 18 years or in the year in which you intend for your child to go to college. The investments in the fund will move from more to less aggressive as that date gets closer.
Another option is to invest a third of your money into a total stock market fund, a third in a total bond market fund, and the final third split between international funds. (You can also split the last third of the money between the stock and bond market funds.) By doing this, you’ll design a balanced, diversified portfolio that moves with the bond and stock markets each year.
No matter which savings plan you choose, be sure to add to it as often as possible. The more money you put away now, the easier it will be to finance your child’s education in the future.
Ilyce Glink is the author of ten books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Her nationally syndicated column, “Real Estate Matters,” appears in more than 125 newspapers and Websites, and her online “Ask Ilyce” columns are read by hundreds of thousands of people every month. She is a top-rated radio host on WSB Radio in Atlanta, the Home Equity blogger at CBS MoneyWatch.com, host of the Internet program “Expert Real Estate Tips,” managing editor of the Equifax Personal Finance Blog, and publisher of ThinkGlink.com.
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