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Tips on How to Save More for College

Tips on How to Save More for College

College expenses can be daunting for any parent.  If you have a child entering college today, the average annual cost can be around $30,000 for in-state public colleges, $50,000 for out of state public colleges, or up to $80,000 for private institutions.  Unfortunately, these prices have consistently outpaced inflation for years with no signs of slowing down.  For new parents, this means that 4 years of college could cost $250,000 - $800,000 per child in 18 years, assuming an inflation rate of 5%.  We use 5% for illustrative purposes, but over the last 20 years, national tuition costs have grown more than 8% per year!

With these figures in mind, it is important to start saving early and often.  Below, we have listed a few savings tips to help bolster your child’s college savings.

  1. Plan early: One of the most critical aspects of planning for college is to understand how much you need to save each month out of cash flow.  The earlier you start saving, the less you will need to save thanks to compounding interest.  
    • If college cost $500,000 in 18 years, a parent who starts saving today would need to allocate a little over $1,000/month into a college savings account to hit their goal (assuming a 7% rate of return).  If that same parent delayed saving for just 5 years, the monthly savings rate would need to jump to approximately $2,000/month to hit the same $500,000 goal.   
    • The parent that started to save right away allocated a total of $216,000 over 18 years while the parent who waited 5 years needed to allocate $312,000, over a 13-year period, to hit the same goal of $500,000.  
  2. Open a state sponsored 529 account:  Funds placed in a state sponsored 529 account can be invested with tax free growth!  In addition, these funds are withdrawn tax free for qualified education expenses such as tuition, books, and meal plans.   In many instances, if you invest in the state 529 plan where you reside, you also get a tax deduction for contributions on your state income tax return.
  3. Re-direct early childhood expenses into your college savings accounts:  When your child no long needs daycare or diapers, redirect those expenses immediately to college savings. This allows you to keep your spending consistent and avoid “lifestyle creep”.
  4. Increase savings after you receive a raise:  As a general rule, we encourage clients to save 50% of any pay raise toward retirement or college savings.  Sticking to this rule will give you a structured savings routine and allow you to consistently increase your annual savings.
  5. Let your family know about 529 gifting:  Many times, grandparents and other family members want to help with college savings.   One of the best ways for them to help is to gift assets directly into a child’s 529 savings account.  Most state sponsored plans make it very easy to make gifts and some states even provide state tax deductions for doing so!

If you need help finding ways to save for your child’s college expenses, please reach out to one of our advisors here at Wolf Group Capital Advisors.

Written by Kevin Ostergaard, Financial Advisor