5 Steps to Help Make College Saving Manageable
February 25, 2015 | Your Finances
Tuition costs are skyrocketing, student debt has been mounting, and some newly minted college grads are struggling to find meaningful jobs. And yet a four-year college degree has never been more valuable.
Proof that college still matters comes from a 2014 Federal Reserve of San Francisco study that found, on average, people with a bachelor’s degree earn $830,000 more over a lifetime than those with just a high school education.
So how does a family go about planning for a child’s higher education? As with any significant financial goal, there are a few key steps to keep in mind.
1. Do the math. To set and achieve realistic college savings goals, start by understanding what college may cost. Don’t let the cost put you off, however. The actual, final price (or “net price”) you’ll pay for a specific college is the published price to attend that college minus any grants, scholarships and education tax benefits for which you and/or your child may be eligible. The College Board has an easy-to-use online net price calculator that can help you get a personalized estimate of what a particular college may actually cost you.
2. Open a college savings account. You have more options than ever when it comes to saving for college, ranging from tax-advantaged government savings plans (for example, 529 plans) to investments and permanent life insurance. To learn more about the pros and cons of your various choices, download a free copy of the Northwestern Mutual white paper “Saving for College with Confidence: Your Guide to Education Funding.”
3. Start right away. Look at your budget and come up with a realistic amount you can contribute each month. Even a small amount of money, if invested early, can become sizable through the power of tax-deferred compounding. For example, if you save $250 a month in a tax-deferred college savings plan and earn a 6 percent annual rate of return for your newborn child, you’ll have nearly $100,000 for college when he or she turns 18. Use the College Board’s savings calculator to see how early and regular saving can make your money grow.
What if you put off saving and your child is now in high school? You still have an opportunity to save. Remember, college costs don’t arrive all at once; they stretch over a period of four years (or more). Even if you get a late start, saving now can still make a difference.
4. Get your kids involved. Start discussing college with your children in middle school or even earlier. Focus on the qualities they should identify in a good college for them, and help them see which options may be viable if they get good grades and receive merit-based aid. Encourage your kids to set aside part of their weekly allowance, summer earnings, and/or any cash gifts they receive for their own education. Every dollar they save is a powerful reminder that college is an important part of their future.
5. Don’t derail retirement. Many parents and grandparents view funding college as one of their most important financial priorities. However, don’t let your desire to fund your children’s education stall you from saving for retirement. Your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan.
There’s a lot to balancing college funding with your other financial goals. For this reason, it often makes sense to speak with a financial professional who can review your options and help create a strategy to help ensure you’ll be ready for college when your children are.