Whether you have dreams of sending your newborn child to Harvard, UC Berkeley or San Diego State, you have a lot of savings ahead of you if you plan to foot part of the bill.
You need to come up with a savings plan EARLY – and stick with it for many, many years.
Various types of savings plans exist. In fact there are a few specific ones that are commonly adopted by parents to save for college. Those include:
- Traditional investment savings accounts.
- UGMA (uniform guest to a minor’s accounts in their name).
- UTMA (uniform transfer to a minor’s account in their name).
- 529 College Savings Plan.
- Coverdell Education IRAs
- US Savings Bonds.
But before deciding where to save, the first question most parents ask is “How much do I need to save?”
As an example, let’s calculate how much you need to save for your newborn to afford 4 years at a UC. Today, a UC will run you about $32,000 per year or $130,000 for four years. Tuition cost as well as room and board continually rises about 4-8% per year. If we assume a 5% inflation, these parents will be faced with a $300,000 to $350,000 college bill when their child reaches 18 years old.
These parents of a newborn would want to stash away $1,000 per month, equaling $12,000 a year (assuming an average 4.5% rate of return over 18 years) to accumulate ~$320,000 to fund that one child’s college education. Wow – that’s a lot of savings and may be overwhelming for many new parents to consider!
So now that we know how much we need to save, the next question is how and where should these funds be saved for the next 18 years?
There are 4 key components that should be considered in the decision of where to save these college funds. Those 4 factors are the savings plan, the investment strategy, having access to your money and the spending plan.
- Savings Plan
- Should be easy – auto withdrawal.
- Contribution limits.
- Outside help – choose a convenient way for family to help.
- Investment strategy
- Choose your risk and expected return.
- How will taxation impact our rate of return (tax now, tax every year, tax later)?
- Access to the money
- Would you like access to this money during the saving period?
- Access if you have an emergency.
- Access for a great investment opportunity.
- Spending Plan
- Spending Plan
- Flexibility. Timing.
- Do you want to have all your money in a plan that must be used for college funding?
- Spending Plan
When it comes to college savings and funding, a vital 5th component may be whether the savings are visible or invisible to the financial aid calculation. Every family should assess whether it is possible that they may qualify for need based financial aid, and if they do, then the 5th component becomes all-important.
Listen to the April 19th College Smart Radio show to start to run the numbers of how much to save and why these 4 or 5 components should be serious considerations for your savings plan. Listen in to next week’s show to understand the pros and cons of different savings plans, so you can determine which single plan or combination of plans is right for your family.
This post highlights essential information pulled from our College Smart Radio “Tackling the Runaway Cost of College” April 19th broadcast where Beatrice Schultz and Mark Guthrie discussed the factors of where to save for your child’s college fund. Listen to this broadcast on YouTube here.
Photo Credit: Images of Money