Paying for your child’s college education may seem a lifetime away and saving for it may seem overly daunting if you wait too long to get started. But there are a few guidelines to help you feel confident that you’ll be able to help with the tuition bills.
In 2021, the average cost to attend one year of college including tuition, books, fees room, board and supplies ranged from $18,550 to $54,880, according to Forbes Advisor. Forbes also reported that in 2017-18, 86% of full-time undergrad students received some type of financial aid.
After financial aid, and not every student qualifies for aid, the balance must be covered out of pocket, through student loans or from a college savings plan. If you’re ahead of the game and want to get started shortly after your child is born, you may want to consider opening a college investment plan such as a tax-advantaged 529 savings plan through CollegeInvest. While there are restrictions on how the funds are used, it will grow without capital gains tax consequences and may not be taxed at the state and federal levels when used for a qualifying educational expense. Some 529 plans also allow you to buy future tuition in specific colleges and universities at today’s tuition prices.
Fidelity Investments recommends you use the 2K rule to determine how much to save for college. While it is just a rule of thumb and individual situations vary, the 2K rule suggests that you multiply your child’s age by $2,000. The result is how much you should have already saved to be on track to cover half the cost of a four-year public university. For example, if your child is three, you should have $6,000 and if they are seven, you should have $14,000. The 2K rule assumes you are investing in a 529 plan and your student will qualify for some financial assistance.
Here are three tips to consider for saving and investing for college:
- High-yield savings accounts are a safe place to put short-term savings and emergency funds. If your child will soon be enrolling in college, it’s important to have tuition money in a safe investment, and these usually are covered by FDIC insurance.
- 529 plans grow tax deferred and are usually tax free if used for higher education. The Secure Act of 2019 also allows these accounts to be used for other education expenses such as private school, apprenticeships and student loan repayment.
- Roth IRAs grow tax deferred and can have tax-free withdrawals if used for the account owner or their child’s higher education expenses. If there is money left over after college, the extra can remain in your account for retirement. Regular IRAs can also be used, but the withdrawals are typically subject to income tax.
As you determine how much you can realistically put toward your child’s future tuition, don’t forgo planning for your own future. It is important to continue saving for retirement and maintaining an emergency fund in case of job loss or other unexpected expenses. College savings, like other savings plans, are a journey of incremental steps to a more secure future, and it’s not a bad idea to have your child participate in their own college savings when they start their first job.
If you are looking for tools to help determine current and future costs of college, the U.S. Department of Education has resources and calculators to help you determine what your child may pay when they are ready to start college.