Funding for College
In the first two parts of our college series, we talked about planning, preparing, and paying for college. This final article will discuss saving for college, focused primarily on parents with younger children. Many newlyweds without children are not immediately thinking about college savings for the children they don’t have yet. The turning point to start talking about college can begin shortly after children are born, regardless of whether the parents are in a financial position to begin saving.
In future articles, I’ll talk more about retirement planning vs. college saving, but just know everyone’s financial situation can vary widely, and some families just starting with a newborn are nowhere close to being able to save for college, and that’s ok! Families living paycheck to paycheck and struggling to make ends meet need to focus on building a solid financial foundation before even thinking about college. Once a foundation is created, the below options can be easily leveraged to position your kids for success as they enter college.
Savings Account
One of the easiest ways to start saving for college is to open a savings account. Most people already have a savings and checking account, and setting money aside can be as easy as transferring money on your phone to a separate account. To succeed in the long run, I highly recommend establishing a different savings account just for college savings. This could be a joint account with your child, so they have access in the future and can deposit money on their own, such as birthday money. Having a separate account also prevents co-mingling cash from other accounts and can separate different savings. This option is readily available to high school students working a job after school or a side hustle like babysitting and wants to put that money towards college. One downside to a savings account is that it doesn’t earn significant interest on your money, so what you deposit is roughly what you’ll have available toward school. Currently, interest rates range from 1% to 3.5% return on your money, depending on your chosen bank.
Savings Bonds
Many parents and grandparents today will likely remember the paper savings bonds they received in their birthday cards as they were prevalent in the 1990s and early 2000s. Today majority of savings bonds are all done online these days. EE Savings Bonds are the most common as they earn interest each month, and the US Treasury Department guarantees they will double in value in 20 years. Currently, the interest rate on an EE bond is at 2.10% and is relatively in line with savings accounts. When it comes to savings bonds, you’re usually playing the long game, and they make great gifts for younger children from grandparents, aunts, and uncles. Savings bonds can be purchased online at https://treasurydirect.gov/savings-bonds/.
Certificate of Deposits (CDs)
CDs are a financial product many banks and institutions offer as an alternative to savings accounts. CDs work by depositing a specific dollar amount for a particular time and getting a set interest rate. For example, you could deposit $1,000 for one year and yield 4.25%. CDs typically yield better interest rates than savings accounts; however, you lose access to those funds for the duration of the CD length. You usually get a higher interest rate the longer you commit your money, and the more you put into the CD. In extreme situations, you can access those funds, but you will lose earned interest and likely pay a fee, so it should only be done in an emergency. CDs are not the best option for high school students getting ready to graduate and needing immediate access to funds to start paying for college. CDs, however, could be an effective saving tool if you have some cash you don’t need to access in the near term.
529 College Plans
529 plans are one of the best and most unique savings plans available to parents. What makes a 529 special is the tax advantage that comes with it, the ability to invest in various areas, and the possibility to earn a much higher rate of return than a CD or savings account could earn. Many financial institutions offer 529 plans that can be invested in different portfolios based on the investor’s risk tolerance. Due to the tax benefits of the 529 plan, there are some restrictions on the money, and the funds must be used for education-related expenses. Additionally, you must have the child’s social security number to start a 529 plan, so you can’t take advantage of this option until after the child is born. If you decide to open a 529 plan, compare different financial institutions, as the initial deposit amount can vary, and the options to invest in various stocks can vary greatly.
Rising College Costs
It’s no question that the price of college is rising and will only increase over the coming years. For parents with small children, the cost to attend a university could easily be 50% higher than today. A Georgetown University Center report highlighted that an undergraduate degree had increased by nearly 170% since 1980. Significant variables contribute to this increase, but all you need to know is that today’s cost to attend a four-year school will be drastically higher in the years to come. If you’re a student getting ready to graduate high school, you can expect slight increases in tuition costs, but it shouldn’t be anything drastic. Many universities froze their tuition during the height of the pandemic; however, we’ve seen multiple colleges starting to implement a rate hike for the fall of 2022 and spring of 2023. For parents, you have time to start saving for your child’s college, but keep in mind the overall cost to attend a school will be higher by the time your child attends.
College and the preparations
As we close out this college series of articles, there’s a lot to think about when it comes to choosing a college, from the preparation to paying for it. I can’t recommend enough doing adequate research on the program/college you want to attend. No school will be the same, and it starts with the application process. Ensure you understand the requirements for your application to guarantee you have no surprises. If possible, visit the college to get a good understanding of what is offered. This includes not just the college itself but the surrounding city. For parents, it’s never too early to start planning. Many parents won’t be ready to start college savings immediately, but when the timing is right, every bit helps, and savings can add up over the years.