There are steps you can take to start preparing your child for college, even during the earliest stages of their life. If you have a baby or toddler, your focus right now should be on saving money for college.
Time is your most valuable asset when saving for college. The more time the earnings in your college savings plan has to compound tax-free, the larger your account balance will grow.
Start saving for college
The best way to start saving for college is to open a 529 plan. Investments in a 529 plan grow on a tax-deferred basis and can be withdrawn tax-free to pay for qualified education expenses.
Parents who start saving in a 529 plan when their children are young accumulate a larger portion of their total savings from investment earnings than parents who wait to start saving. The earlier you start to save, the less you will have to contribute each month to reach the same college savings goal.
In 18 years, the cost of tuition, fees and room and board at a 4-year, in-state public college will be around $130,000, and the cost to attend a 4-year private, non-profit college is projected to be more than double that amount.
However, experts recommend parents save about one-third of total projected college costs. For example, saving just $5 a day from birth will cover one-third of the cost of an in-state public 4-year college. The remaining two-thirds are covered by current income and student loans. Parents can use a college savings calculator to determine an appropriate amount to save each month.
At this stage, parents probably don’t know which college their child will attend (if any), but there are still benefits to starting to save early. Most careers require some form of post-secondary education. 529 plans can be used to pay for more than just traditional 4-year colleges and universities, including trade schools, community colleges and vocational training.
Look for a 529 plan with low fees
There are over 90 529 plans available, with over 1,000 investment options to choose from. For some parents, an in-state 529 plan is a smart option. Many states offer taxpayers a state income tax deduction or state income tax credit for contributions to the state’s 529 plan.
However, a state income tax benefit should not be the only factor considered when selecting a 529 plan. For parents with young children, it is more important to invest in a 529 plan with a low expense ratio, which is an annual fee based on the percentage of assets in a 529 plan account.
Parents who invest $20,000 in a 529 plan with a 1.00% expense ratio would pay $200. But, if the 529 plan had an expense ratio of 0.15%, the parents would pay only $30 in fees that year. Even small fees add up over time. The less you pay in fees, the more you can save for college.
Select an age-based asset allocation
An age-based asset allocation is designed to reduce risk in a 529 plan portfolio as the beneficiary gets closer to college. Unlike a static asset allocation, which remains the same over the life of the account, an age-based portfolio generally starts out with a heavier allocation toward equities (stocks) and automatically shifts toward more conservative investments over time.
Age-based allocations are best for parents who are new to investing, or those who prefer to “set it and forget it.”
One of the easiest ways to consistently grow your college savings is to select an automatic investment plan when you enroll in a 529 plan. Most 529 plans allow you to schedule automatic deposits from a linked bank account, helping you put money away for college before you have a chance to spend it on something else.
With automatic investing, you will take advantage of dollar-cost averaging. With dollar-cost averaging, you will purchase fewer shares when stock prices are higher and more shares when markets are down. The average cost per share in your 529 plan will represent the premium prices of a bull market and the discounted prices of a bear market.
Tell your friends and family
A 529 plan gift is a meaningful alternative to a traditional birthday or holiday gift. Some families include 529 plan on their baby registry so that they can get a head start on saving for college before their child is born.
Gift givers may open a new 529 plan, contribute to a child’s existing 529 plan account or purchase a Gift of College gift card. Many 529 plans offer e-gifting platforms that make it easy to ask for and receive gifts. Some 529 plans allow grandparents and other friends and family to schedule recurring automatic gifts, and track the child’s college savings progress.