Investing in the Future: Saving for Your Child’s College Years

Graduation season is upon us, and we are sure many of you are beaming with pride in anticipation of your student hitting yet another milestone. Whether college is on the near horizon or still some years away, the cost of education is at the forefront of the minds of many parents and grandparents. The cost of college continues to rise every year. In fact, the historical average inflation rate of college costs is between 5% to 8% according to The College Board. While the idea of an ever increasing college price tag may be intimidating, the good news is that there are several ways that families can begin saving such as prepaid tuition plans, 529 savings plans, and other types of education savings plans.

A qualified tuition plan, such as a prepaid tuition plan or a 529 savings plan, is a popular savings vehicle. Prepaid tuition plans allow investors to purchase tuition credits at today’s prices and use those credits to pay the cost of tuition in the future. This could provide significant savings since the price of tuition generally increases every year. These plans pay only for the cost of tuition and fees at eligible public in-state colleges and universities. However, there are some prepaid plans that can be used at private or out-of-state institutions as well. 529 savings plans are investment accounts that allow investors to save money for K-12 and college expenses. Unlike prepaid tuition plans where you may be limited to institutions within your state of residency, investors can open a 529 savings plan in any state regardless of residency.  Both prepaid tuition plans and 529 savings plans provide investors with tax-free  savings towards their child’s education if distributions are used for qualified education expenses.

By contributing to your child’s education fund early, you allow those funds a longer time horizon to grow and allow yourself enough breathing room financially. By the time a newborn child graduates with her 4-year undergraduate degree, the total cost of tuition and related expenses at the average Texas public university would be $304,801 after 7% annual inflation. For example, let’s say you have selected a 529 plan with a dynamic age-based asset allocation and began contributing to the account as soon as your child was born. If the portfolio performs according to historical blended benchmark returns over an 18-year investment time horizon, you would have to contribute a total of $95,162 to the plan to fund 100% of the total cost of tuition and related expenses. This is only 31% of the total cost. Another example would be if you waited until your child began middle school to begin saving for college. In this case, your total contributions to the plan would increase by 56% to $148,382. This would equal nearly 50% of the total college cost. While this amount may not appear to be too expensive, by saving earlier you will not have to contribute as much as if you were to wait. Your child’s education may be one of many savings goals, so make sure to contact an advisor at Goodman Financial to determine how education funding will fit into your overall financial plan.