When Should You Start Saving for Your Child’s College Fund?
Posted by : Premraj | Posted on : Friday, February 21, 2014
DELICIOUS
SU
REDDITIf you’ve ever asked yourself when is the best time to start saving for your child’s college fund, the answer is now, no matter how many years you have to go before your child enters college.
With yearly tuition for 4-year public colleges averaging more than $7,000, and private colleges averaging more than $15,000, according to the U.S. Department of Education, there is little time to wait. The Department of Education projects that 4-year public universities increase tuition costs by an average of 5% each year, with private 4-year colleges facing more than 8% in tuition hikes each year. With the staggering cost of education, it is no wonder that parents should start saving early.
Can I save before my child is born?
The short answer is yes. While opening certain accounts, such as a 529 Savings Plan, requires a social security number, certain “gift accounts” do not. There are various private registry services that allow parents and friends to contribute the money now and transfer the money to a 529 later on. Parents may also open a 529 in their own name, and then change the beneficiary of the plan to their child (in the child’s name and social security number) when the child is born.
How much will I need?
The amount of tuition money you will need to put away depends on where your child will likely attend college. Although you probably do not know this now, there is a vast difference between the price of public and private colleges and universities. Keep in mind, if you put away just $100 per month once your child is born, and do so for the next 18 years, your child will have a little more than $21,000 for tuition, not accounting for interest. Some colleges cost more than that each year. If you wait until your child is age 5, that available tuition drops to about $15,000. By age 10, the available funds drop to less than $10,000. It is no wonder why the experts suggest you should start saving as soon as possible.
How do I begin?
529 Savings Plans are a good way to start saving money when your child is very young, tax-free. When your child comes of age, the money can then go to pay for either undergraduate or graduate studies at accredited colleges in the United States. The money, however, must be used to pay for tuition, books, room and board, or other related fees. Prepaid tuition plans also offer parents an alternative, allowing you to lock in tuition prices per credit hour at today’s rates, for use in the future. These types of plans are tied to specific states, colleges, and universities.
What other options are out there?
Other options include Coverdell Education Savings Accounts. Similar to an IRA, you can contribute up to $2,000 per year, post-tax. The money then sits there and grows, tax-free. As long as you use it for education-related purposes, you will never pay taxes. A custodial account allows you to contribute up to $850 per year, tax-free, with the account in your child’s name until they reach legal adulthood. Withdrawals are taxed.
College tuition is expensive, but it is a valued part of a child’s development and future success. Start early with a reputable savings plan to give your child, and yourself, the necessary jump-start to a bright future.
