How New Parents Can Save For College
By Joe Messinger, CFP®
January 4, 2019
You just had a baby! Congratulations!! You are starting on an amazing journey that will change your life. After the bliss where’s off a bit, parents realize a universal truth… children are expensive! For a middle-income family to raise a child born in 2015 through the age of 17, the cost of rearing a child has hit $233,610. Families with higher incomes (over $107,000) can expect to pay $372,210.
These figures do NOT include the cost of college which can range from $21,000 to $45,000 per year on average currently. Factor in a 5% increase in costs per year, and 18 years from now the estimated cost per year could be over $51,000 for a public, in-state university. Ouch! (Click here for a handy calculator to project future costs.) So, how can new parents save for college?
When faced with the prospect of paying for college 18 years from now, what do we suggest?
Just get started saving now. Even saving $25 per week in a 529 plan can be helpful. If you’re thinking that student loans will do the trick consider this from our blog:
A parent investing $25 per week ($100 per month) for the next 18 years will accumulate a total contribution over of $23,400. Assuming a 6% interest, they will have saved $42,095 due to compounding interest and the time value of money.
If they were to borrow $42,095 as a student loan with 6% interest over a 10-year repayment period, they will have paid a total of $56,081 when factoring in principal plus interest.
The $23,400 invested resulted in a gain of $18,695 for a total of $42,095 to pay for college. Borrowing that same $42,095 to pay for college will cost $13,986 in interest and a total of $56,081. Which sounds like a better deal…$23,400 or $56,081?!
What is a 529 plan anyway?
New parents need to do a little reading to get up to speed on 529 plans. Take a moment with these blog posts:
- What is a 529 Plan? How to Choose One? (And a little advice)
- 3 Tips for Investing Wisely in a 529 Plan
- 529 ABLE Savings Accounts for Individuals with Disabilities
What about saving for retirement?
If possible, save some for both–even if the 529 is only getting a bare minimum. Before saving for college or any other goals ensure you are getting the maximum employer match in your at work retirement plan. If you really have to choose between saving for retirement and saving for college, choose retirement first. We can find other ways to pay for college (loans), but you can’t take out a loan to pay for retirement.
As your salary increases over time, start dedicating more to saving for college. For many families daycare is a huge expense until the kids are in elementary school. When the baby moves from daycare to elementary school, put the money that would have been spent on daycare into a 529 plan. Saving that amount each month from 5 to 18 years old creates a tremendous college nest egg!
A new baby creates new grandparents!
One of the many joys of having a new baby is having new grandparents. Congratulations on bringing new grandparents into the world! Some grandparents want to start saving for college too. Long ago, grandparents may have purchased savings bonds. While these are still around, their use has dwindled.
Today’s grandparents can open 529 plans or contribute to plans owned by the parents. Deciding the details like who is the owner of the account–parent or grandparent–can take some planning. A quick tip to have grandparents consider is splitting their gifts. Spend half on something fun, and contribute half to the college savings plan. Read this piece about what families need to know–including non-529 options. In addition, spend a moment with this article about dos and don’ts for grandparents.
Down the road
As the family continues to grow and the children become older, parents should learn the finer points about how families pay for college. What are families expected to pay for college? How does having multiple children affect the costs? Parents can take steps (subscribe to our newsletter, watch a webinar, or follow our social media) to become an educated consumer.
In the meantime, take the baby steps needed to begin the journey towards a college education for your new addition.
May 29, 2020