Buying a house, purchasing a car, having a baby – these are all major life expenses, and paying for college or other post-secondary education is no different. Like any big life expenditure, saving is key.
How much do you need to save for college?
This can feel like the million-dollar question – and this number will vary depending on a variety of factors, such as the cost of tuition, how many children you have and the number of years until they start college.
A general goal to aim for is saving one third of future college costs. Since college costs have historically increased threefold during the period from birth to college enrollment, you can get a ballpark savings target by looking at the cost of a college education the year your child was born. It’s also important to remember and factor in other financing sources, such as student loans, as you think about your savings plan for your child’s education.
You can check your savings progress using Bellco’s college savings calculator for parents, to get an idea of how much you should be saving each month. The savings calculator considers the age of your children, how many children you have, inflation rates and the rate of return on your investments.
Five Tips to Start Saving for College
So where should parents begin? These five tips can help you sharpen your saving skills and get started on a savings plan for your child’s education that works for you.
1. Start early and save often. The sooner you start, the more time there is for your savings to grow and the earnings to compound. For example, if you start saving when your child is born, about a third of your savings will come from interest earned. On the flipside, if you start when they enter high school, less than 10% of savings will come from earnings.
2. Find a savings plan that meets your needs. Be sure to explore and take advantage of existing plans and options. One of the best plans developed specifically for education savings is a 529 plan. This type of plan is usually sponsored by state governments and allows you to invest money – which you can deduct from your state income tax – and then withdraw for college or other eligible institution qualified expenses tax-free. Other options to explore include Coverdell education savings accounts, U.S. Savings Bonds and Roth IRA accounts (although you may have to pay taxes on earnings attributed to the withdrawal for the Roth IRA).
3. Strike a balance between savings and loans. While saving more will reduce the amount of loans your student has, that savings amount will be different for every family. Looking at current college costs, a good goal could be saving $250 per month for an in-state 4-year public college or $550 per month for a 4-year private college. If these figures are outside your budget, it still helps to save what you can. After all, it’s cheaper to save than to borrow.
4. Set up automatic deposits into your savings. Take one item off your to-do list and automate deposits to your savings accounts. For example, you can set up automatic monthly transfers from your bank account to your 529 account. And these don’t have to be large deposits – many allow contributions as low as $25 a month. Sometimes the biggest step is getting started, and you can always increase the amount later.
5. Get creative! Keep your savings goals in mind when life changes might boost your finances. If you received a raise, an inheritance or a tax refund, consider making a deposit into your college savings account. Alternatively, did your child just graduate from diapers and daycare? Try redirecting this spending toward saving for college. You can also have your teenager help out with the savings for their own college tuition. Helping teens open a Bellco Free Student Checking Account is a great way to teach your kids financial responsibility.
Saving for college will look different for every family, but one tip everyone can benefit from is that it’s never too early to start! Regardless of your family’s goals and budget, there are college savings options for everyone. If you’re thinking about using a tax-deferred plan, like a 529 plan or Coverdell account, please consult a tax expert that can help you understand the differences.