Getting a Head Start on College Savings
The American family with a child born today can expect to spend about $233,610 to raise that child to the age of 18.1 And if you’ve already traded that supercharged convertible dream for a minivan, you can expect your little one’s college education to cost as much as $198,000.2
But before you throw your hands up in the air and send junior out looking for a job, you might consider a few strategies to help you prepare for the cost of higher education.
First, take advantage of time. The time value of money is the concept that the money in your pocket today is worth more than that same amount will be worth tomorrow because it has more earning potential. If you put $100 a month toward your child’s college education, after 17 years’ time, you would have saved $20,400. But that same $100 a month would be worth over $32,000 if it had generated a hypothetical 5% annual rate of return. (The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk. Actual results will fluctuate. Past performance does not guarantee future results) The bottom line is, the earlier you start, the more time you give your money to grow.
Second, don’t panic. Every parent knows the feeling – one minute you’re holding a little miracle in your arms, the next you’re trying to figure out how to pay for braces, piano lessons, and summer camp. You may feel like saving for college is a pipe dream. But remember, many people get some sort of help in the form of financial aid and scholarships. Although it’s difficult to forecast how much help you may get in aid and scholarships, they can provide a valuable supplement to what you have already saved.
Finally, weigh your options. There are a number of federal and state-sponsored, tax-advantaged college savings programs available. Some offer prepaid tuition plans and others offer tax-deferred savings. (The tax implications of education savings programs can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.) Many such plans are state sponsored, so the details will vary from one state to the next. A number of private colleges and universities now also offer prepaid tuition plans for their institutions. It pays to do your homework to find the vehicle that may work best for you.
As a parent, you teach your children to dream big and believe in their ability to overcome any obstacle. By investing wisely, you can help tackle the financial obstacles of higher education for them – and smooth the way for them to pursue their dreams.
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A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals.
Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.