While no one can predict the future costs of education one thing is certain; it won’t be cheap. Almost from the moment, a child is born, parents start to think about college and the ever-rising cost of a continuing education. How much will their child need? What is a good estimate? How should this money be invested or where is the best place to park their child’s college fund?
Of course, costs will vary depending on which college your child will attend and whether they will qualify for financial aid or a scholarship, but the following guidelines can help parents at least get a basic idea about how much they should be set aside and where the money should be placed.
How Much is Enough?
Many experts suggest that you multiply your child’s age by 2 as a base sum. So, if your child is 5 years old, you should already have $10,000. This would give you $36,000 as a base fund, which currently funds about half of an average 4-year college education.
The Real Advantage
The absolute best way to fund your child’s college education is to do so as early as possible and contribute to that account regularly. Whether you choose to do it annual or monthly isn’t as important as just doing it!
College seems so far away, and many parents put off saving until their child is in junior high or even high school! This is usually far too late.
Consider asking friends and relatives to donate to your child’s education fund, rather than buy more toys or clothing. Those small amounts every year really add up over time, especially when you consider compounding interest.
Where Should the Money Go?
One of the best places to park your child’s money is in a state-sponsored, tax-advantaged 529 plan. Interest earned on these plans are not taxed as capital gains by the IRS and are not taxed by most states when the money is used for education expenses.
In fact, 33 states give their residents a credit on their state taxes if they invest in the state’s 529 plan and 5 states offer a state income tax deduction for any 529 contribution.
Different 529 Plans
Be aware that there are two types of 529 savings plans. Some are sold through financial advisors and others are sold by the state. While the direct state sponsored 529 plans have lower investment fees, the financial advisors will be quick to point out that their plans offer more investment options.
Another type of 529 plan allows you to pay for your child’s college education now, at today’s prices. These prepaid plans are typically used at state public colleges, but a few plans are sponsored by private colleges.
This sounds like a great idea, however, what if you move out of state or if your child decides that they want to go to a different college?
The Bottom Line
By contributing a minimum of $2,000 each year and placing that money in a 529 plan, your child’s future college expenses can become one less thing for parents to worry about at night.