But someday I will, and some 20 years from now they’ll be in college.
I hope to give my kids the same opportunities that my parents gave me. After public school K-12, I went to a 4-year private university courtesy of my parents’ incredible generosity, never-ending penny pinching, and a little bit of luck.
Unfortunately for my future kids, the cost of college has soared 1,120% over the past 30 years and shows no signs of stopping. According to this handy college cost calculator (and assuming the average annual college cost inflation rate remains 6%), tuition, room and board at a 4-year private university could cost over $520,000 by the time my unborn children get to college. An in-state public university could cost as much as $240,000. Yowza. (You can use the calculator to estimate how much college education will cost for your kids based on their age right now.)
While tempting to stick my head in the sand, I’ve committed to getting my financial house in order and I know that—just like retirement—I need to think about saving for college sooner rather than later. A dollar invested today is worth exponentially more than a dollar invested later in life, because it has more time to grow.
Resisting every urge to head for the hills, I looked for tips. Here are the 5 most helpful ones I found:
1. Saving for your own retirement is more important than saving for college. You can ultimately borrow to cover a college shortfall; you can’t borrow to cover your retirement. So save first for retirement, second for college.
2. The sooner you start saving for college, the better. Ahh, the beauty of compound interest.
3. Stocks are an essential ingredient of a college savings portfolio. With tuition costs rising four times faster than the rate of inflation, a college fund needs growth potential. As your child gets closer to college age, you can steadily shift your investments into bonds and cash.
4. 529 savings plans are excellent options to save for college. You can use 529 accounts for education expenses at eligible 2- or 4-year colleges, graduate schools or vocational schools in the United States and some schools abroad. You can even use them for your own educational trip later in life if you so choose.
529 accounts offer significant federal (and in some cases, state) tax advantages—far more than any other type of college savings account. Although you contribute to a 529 account after taxes, your investment grows tax-free, and distributions when your child is in college are tax-free. As of January 1, 2013, you can contribute up to $14,000 each year ($28,000 for married couples) for each beneficiary, without gift tax consequences. Some states also offer income tax deductions for 529 contributions—check this list for details on your state. In all, it’s estimated that the value of federal tax benefits alone can amount to $80,000 (!) over the life of a 529 account (see Figure 1 in this brochure for more details).
An especially important feature for me, given that my kids aren’t born yet, is that you can change beneficiaries along the way. So if I set up an account now for my firstborn child—who ends up getting a full-ride scholarship because of his truly amazing athletic ability (hey, one can hope)—I can switch the beneficiary later to my second-born without any negative consequences.
Another important benefit—529s are not treated as “student assets” when applying for financial aid, unlike some other types of college funds. That means that your “expected contribution” from the account (or the amount that the university expects you to pay, and counts against any potential financial aid) is at the 5.64% “parental asset” rate, rather than the 20% “student asset” rate that’s applied to other types of accounts. See this helpful guide from Yale’s financial aid department for more—it explains how various investment accounts are used to determine a student’s financial need.
If a 529 plan doesn’t sound like you, check out this college savings comparison tool to investigate other types of accounts.
5. Your relatives might want to help. 60% of grandparents say they would contribute to a college savings plan if asked. Making a contribution to a college fund instead of extravagant birthday gift may be appealing to some grandparents. If they contribute to a 529 that you set up on behalf of your kids, they’ll have the comfort of knowing that those funds can be used for education and education only. You can’t say the same for cash gifts. And if a grandparent sets up the 529 plan themselves, they may be able to benefit from some of the same tax breaks mentioned above.
On top of my other savings goals, it’s not financially feasible for me to save over $2,000 per month right now to get to $520,000 in 18 years. But, that doesn’t mean I shouldn’t save at all.
I’m going to talk to my husband and our Certified Financial Planner (CFP) about how much we can afford to save now and over the long term. Once we’re ready to invest, I’m going to check out the iShares 529 plan because it offers several kinds of portfolios that feature my favorite ETFs at a low cost.
I may not have kids yet, but hopefully with early saving, careful planning and a little bit of luck, I’ll be able to give them the same opportunities my parents gave me.
Want to follow my financial journey? Check out my other recent posts here.
For more information about the iShares 529 Plan, contact your financial advisor, call 1-888-529-9552 or visit www.ishares529.com to obtain a Program Description and Participation Agreement which includes investment objectives, risks, charges, expenses and other important information; read and consider it carefully before investing or sending money. Upromise Investments, Inc., Co-Distributor and Underwriter; BlackRock Investments, LLC, Co-Distributor.
Please Note: Before investing in any 529 plan, you should consider whether your or the designated beneficiary’s home state offers a 529 plan that provides its taxpayers with state tax or other benefits that are only available through the home state’s 529 plan. You also may wish to contact directly your home state’s 529 college savings plan(s), or any other 529 plan, to learn more about those plans’ features, benefits, and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
The iShares 529 Plan is a college tuition savings program sponsored by the State of Arkansas and is administered by The Arkansas 529 Plan Review Committee (Committee). Upromise Investments, Inc. (UII), and Upromise Investment Advisors, LLC (UIA), serve as the Program Manager and Recordkeeping and Servicing Agent, respectively, with overall responsibility for the day-to-day operations, including marketing and co-distribution of the iShares 529 Plan. BlackRock Investments, LLC, also has responsibility for co-distribution of the iShares 529 Plan. BlackRock Institutional Trust Company, N.A., serves as Investment Manager of the iShares 529 Plan except for the Savings Portfolio, which is managed by Sallie Mae Bank. The iShares 529 Plan’s Portfolios invest in either (i) exchange traded funds; or (ii) a Federal Deposit Insurance Corporation (FDIC)-insured omnibus savings account held in trust by the Committee at Sallie Mae Bank. Upromise, Inc., UII, UIA and Sallie Mae Bank are affiliates. Units of the Portfolios are municipal securities, are not exchange traded funds, and the value of units will vary with market conditions.
Investment returns will vary depending on the performance of the Portfolios you choose. Except to the extent of FDIC insurance available for the Savings Portfolio, you could lose all or a portion of your money by investing in the iShares 529 Plan, depending on market conditions. Account Owners assume all investment risks as well as responsibility for any federal and state tax consequences.
Investing involves risk, including possible loss of principal.
BlackRock Institutional Trust Company, N.A., and BlackRock Investments, LLC, are subsidiaries of BlackRock, Inc., none of which is affiliated with Upromise.
* Not FDIC Insured (except for the Savings Portfolio) * No Bank, State or Federal Guarantee * May Lose Value
© 2013 BlackRock, Inc. Upromise and the Upromise logo are registered servicemarks of Upromise, Inc. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. Used with permission.