The truth is, college is expensive. And it’s getting more and more expensive each year.
Many parents and guardians reach the time when a child is ready for college and panic when they see the tuition and living expenses price tag, which can be as much as $60,000+ a year for private colleges and universities.
Though it’s not just a parent’s responsibility to set up a college fund or pay for their child’s college tuition, both parents and children can benefit from setting up a college fund — even to just put a dent in the cost to avoid overwhelming student loans that will take decades to pay off.
By setting up a college fund, you can significantly reduce the cost of college, if not pay for college entirely, especially if you start early.
Here are three tips to help ease the pain and fear of setting up a college fund.
1. Start as early as possible.
The best possible tip is to start saving for college as early as you can — most ideally right at a child’s birth. However, if you haven’t started, just start now.
The earlier you start, the less money you’ll have to contribute, and the more you’ll see that money accrue over the years.
However, one of the greatest barriers for parents or guardians who hope to save for kids’ college tuition is choosing a plan and getting started. Most people think the process will be too complicated, but it’s a lot simpler than you might assume. The most important step is to just get started.
2. Choose a plan that’s right for you.
When it comes to college savings plans, so many options are available to parents and other angel adults who want to help children pay for college. However, one of the most popular types of plans is a 529 plan.
If you’re overwhelmed by the process of opening such a plan, Forbes explains 5 steps to opening a 529 college savings account in an extremely helpful article. However, here are the highlights.
You might have heard of a 529 plan before, which was named from an IRS code section that specifically allows adults to save for college in a child’s name and also offers tax benefits. For example, the investment earnings from the 529 account are allowed to grow without being affected by federal taxes if they are used for qualifying college expenses.
A 529 account can even be opened for the benefit of a student who is not the donor’s child, and then any funds that go unused can later be designated for another student at a later date.
Prepaid or Savings?
You can choose a prepaid plan, a savings plan, or both.
Savings plans have similar structures to 401(k)s by investing in stocks, bonds, and other securities within securities markets.
Prepaid plans are more like pensions and grow at a rate that is guaranteed by the sponsor of the account; however, these are usually limited to state schools and/or state residents.
You can open one of each type if you choose!
In-State or Out-of-State?
Then, choose whether you want an in- or out-of-state plan. If your state offers a tax benefits for 529 plans, you might want to choose the in-state plan.
Go with Low-Cost First
Sites like collegesavings.org will help you compare investment options and costs for whichever plan you choose. According to Forbes, the most important consideration is cost, so if you’re unsure which plan is best, go with a low-cost plan over worrying about other factors.
Make sure you have your personal information (name, address, date of birth, social security number) and the account beneficiary’s information (like date of birth and social security number) available when you go to set up your plan. You will also have the option to name a successor account owner in the event that something should happen to the primary account owner.
If you’re feeling overwhelmed, don’t worry: you can change your plan if it no longer works for you, and most plans are generally good.
Open the Account and Deposit Funds
Once you’ve chosen a 529 plan, you’ll need to fill out the application to open the account, by mail or sometimes even more easily online, choose investments for the account, and deposit funds.
Keep in mind that only a few plans offer options for joint accounts, so in many cases your spouse will not have access to the account without Power of Attorney.
3. Start with an amount that’s right for you.
If you start early enough, you can save as little as $25 from each paycheck and actually make a huge difference in your child’s college future. Consider how much a private or public college might cost in tuition and living expenses and calculate backwards based on how many years you have to save.
However, if you can’t save enough to cover the entire cost, the best choice is just to save what you can. Any little bit will help your child avoid too much student debt, and you might be able to apply for financial aid when the time comes.
Again, most importantly, no college fund will help with the cost of college until it’s started. So start now! It won’t be nearly as hard as you think.