$216,000. That’s what a 4-year degree at a state college is estimated to cost in 2035, assuming tuition continues to increase at the current annual rate of six percent. Send your kid to a private institution instead, and you can expect to shell out as much as $484,000 ⏤ a number so outrageous that you’d be forgiven if, upon reading it, you decided to skip saving for your kid’s education altogether. Why bother?
Simple, because regardless of how much you can afford each month ⏤ whether it’s $30 or $300 ⏤ says Mark Kantrowitz, publisher and vice president of research for savingforcollege.com, “every dollar you save is a dollar less that you’re going to have to borrow in the future.” And if you plan to help your child at all with education expenses, it makes sense to get a head start now ⏤ even, he says, if you’re also still trying to fund your retirement.
And to help parents do just that, we asked Kantrowitz for some of his top tips to getting a jump start on college savings. Here’s what he recommends.
1. Open a 529 college savings plan and follow the ‘1/3 Rule’
While there is any number of financial vehicles available to parents for saving, 529 college savings plans offer special benefits. They count as parent assets on the Free Application for Federal Student Aid (FAFSA) and thus receive favorable financial aid treatment. Most states offer tax deductions for money contributed to their state’s specific 529 plan. And thanks to changes in the tax code last year, parents can now use the money to also cover K-12 costs in addition to college expenses.
As for how much parents should aim to save in their 529, Kantrowitz recommends following the ‘1/3 rule.’ “It’s very rough cut, but the idea is that college is a major expense and paying for it should be spread it out over time. One third will come from past income, which is savings; one third from current income and financial aid, and then one third from future income which is loans.” Which means that by the time you send a kid off to college, you should have saved 33 percent of their total college bill. “What makes the ‘1/3 rule’ is kind of neat,” Kantrowitz adds, “Is that it meshes well with another statistic: College costs go up by about a factor of three over every 17 year period, from birth to enrollment. And if future college costs are three times current costs, your college savings goal should be the full cost of a college education the year the child was born.”
2. Set up the 529 before your child is born
Thanks to compounding interest, the earlier you can start socking money away, the better. “If you start saving from birth,” Kantrowitz says, “About 1/3 of your goal is going to come from the earnings because there is more time for interest to compound. If you wait until the child enters high school to start saving, however, less than 10 percent of your goal will come from earnings, and you’ll have to save six times as much per month in order to reach the same goal.”
Kantrowitz recommends opening a 529 before your child is born by naming yourself as the account owner and beneficiary. After the child is born and has a social security number, you then you change the beneficiary to the child. Based on what type of college you think your child will attend ⏤ in-state public university, out of state public university or private college ⏤ he advises saving between $250 and $550 a month.
3. Divert money previously spent on other childcare expenses to college savings
In addition to set-it-and-forget-it automatic monthly deductions, Kantrowitz also recommends shifting money directly from child-related expenses you no longer have to pay to your 529 account before you start spending it elsewhere. “Maybe your child no longer needs diapers and you redirect the money you were spending on them to the college savings,” he says, “Diapers aren’t cheap. Same goes with daycare, redirect the money you were spending on daycare when your child starts kindergarten to the college savings account.”
4. Get the money out of your kid’s name
Money in your child’s name that’s not in a 529 savings account will reduce aid eligibility by 20 percent on the FAFSA. Money in a grandparent’s name is not reported as an asset says Kantrowitz, but the distributions count ⏤ and that reduces aid eligibility by a whopping 50 percent. Meanwhile, money saved in a parent’s name only reduces aid by 5.64 percent. Whatever your saving strategy, at the very least, make sure any money you or your child has put away for school is not in their name or accounts by the time they enter college.
5. Consider a Roth IRA instead of a 529 if you’re not positive your child will go to college
Because 529 plans must be used on qualified education expenses, there is a penalty for withdrawing the money if your kid doesn’t go to college. Although you can change the beneficiary to another one of your children, to yourself, or even to an eventual grandchild, so there are options. Nonetheless, if you are concerned that a kid may not attend college, a Roth IRA is an interesting alternative, says Kantrowitz, because the money is can be used for either retirement or education expenses. Because Roth IRA distributions count as income on the FAFSA and reduce aid eligibility by 50 percent, you just have to take them after graduation to pay off loans, he notes, rather than apply the money to tuition bills during school.
“The Roth IRA is a better choice if you have serious doubts about whether your kid is going to go to college,” Kantrowitz says. “If you think there’s a 75 percent chance, or some equally high percentage, that the child’s not going to college then the Roth IRA at least gives them a jump start on saving for retirement.”