In recent weeks, I’ve had the pleasure of viewing many Facebook posts from friends and family showing their kids as the head back to school. Whether your kids are entering kindergarten, high school, or college, fall is a good time to revisit your strategy for college savings.
Here are five key factors to consider when creating or fine-tuning your college savings strategy:
1. Get a handle on your projected costs. Based on current and projected averages, tuition, room and board at a public four-year college could be $100,000 to $125,000 or more, depending on the state in which you live. Private colleges range from $200,000-$300,000. If your children are young, these costs will be much higher 10 or 15 years from now.
2. Save early and often. Begin saving as soon as you can in order to take advantage of compound growth. Consider treating college savings as you treat your retirement savings—as a non-discretionary monthly budget item. Use the power of dollar cost averaging by signing up for a monthly automatic savings plan. Consider devoting bonus income or part of your equity compensation to your college savings accounts. If your goal is to save for 50% of these future expenses, you will have to save $300-$1,200 per month, depending on your child’s current age and potential rates of return.
3. Save in a tax-deferred account. A 529 college savings plan allows you to grow assets tax-deferred—no matter your income level. When it’s time to pay the bills, you can withdraw money tax-free to pay for qualified higher education expenses.
4. Consider the potential for financial aid. While it may be difficult to qualify for financial aid, you can enhance your odds by saving in the right type of account. For example, 20% of the assets that are held in a UTMA or UGMA custodial account will count against federal financial aid, while only 5.6% of assets held in parents’ names will count against you.
5. Diversify your college savings strategy. There are many unknowns when it comes to planning for future college expenses. Therefore, be careful about how much you put away into a 529 college savings plan. If you end up withdrawing funds for non-qualified expenses, you will incur a 10% penalty and have to pay taxes on any earnings. You may want to build in some flexibility by paying some expenses out of pocket or from your taxable accounts.