As the proud mom to 6-year-old twins, I can tell you that being a parent is one of the most wonderful gifts imaginable. However, in a society where it seems like the cost of tuition is continually on the rise, saving for and affording a child’s education has become an increasingly heavy burden for parents.
September is National College Savings Month, the perfect opportunity to explore a few mechanisms and strategies for alleviating some of that financial strain. And no, we are not talking about keeping our fingers crossed for an athletic scholarship.
Here are a few tips:
Procrastination is one of the more common mistakes when it comes to saving for a child’s education. Why? Just like saving for retirement, it’s difficult to sacrifice money and assets in the present for benefits recognized decades down the road. Parents often assume that they can delay saving until their child is significantly older and the thought of college becomes more tangible, which may result in a situation where the college savings account cannot cover the full cost of tuition. Assets must then be drawn from other important goal buckets to cover the expense.
Opening a college savings account and beginning regular contributions as soon as your child is born (or even before) allows the funds more time to grow and compound before withdrawals begin. For my husband and me, establishing a college savings vehicle was high on our priority list after becoming parents.
Consider a 529 plan
There are many mechanisms available to assist parents as they save for their children’s college education, but 529 plans tend to be one of the most user-friendly options. This tax-advantaged savings plan is essentially a savings account specifically reserved for college funds. The structure of 529 plans mandates that the beneficiary put the funds toward some form of education. Contributions to 529 plans grow tax-free over time as long as the eventual withdrawals are utilized for qualified education expenses such as tuition, textbooks, and room and board. Withdrawals used for expenses outside the realm of education are generally subject to strict tax penalties.
Upon opening a 529 plan, make it a point to establish automatic contributions from either your paycheck or a savings account on a monthly basis. Over time, the account will grow in magnitude without you even thinking about it.
Think outside the box
Don’t be afraid to get creative when it comes to college saving strategy. Contributions to a 529 plan or other savings vehicle make great birthday or special occasion gifts. Although your child may not appreciate money earmarked for college savings as much as a new gadget, it is a gift that will pay dividends in the future.
College savings contributions can also be a great way for grandparents to invest in their grandchild’s future. Consider encouraging your parents or other relatives to contribute to the college savings account on an annual basis. This is a simple yet meaningful way for grandparents to take an active role in preparing their grandchildren for adulthood.
It is also prudent to have your child contribute when and where they are able. Especially for those who may have a summer job, requiring them to set aside a portion of that income for college savings sets a strong precedent while growing the account balance.
Although the cost of education is a common concern among parents, a proactive approach and staunch commitment to saving are two of the keys to making the process more manageable for all parties.
Sabina Sewillo is a Family Wealth Advisor, Vice President and Financial Advisor with the Wealth Management Division of Morgan Stanley in Chicago. The information contained in this column is not a solicitation to purchase or sell investments.