Saving For College During the Elementary Years
As a parent of two young adults, some of my favorite years looking back were my children’s elementary school years. The kids were busy and care-free, they were fun to be around (and they still enjoyed being around us), and college was far enough in the future that the prospect of paying for it didn’t keep me awake at night. We still had time to save.
And so do you! Perhaps you started a college savings account when your child was born, added a little bit, and then forgot about it. Or maybe you haven’t started one yet. Either way, now is the time to jumpstart your savings plan.
First, it might be helpful to calculate how much you need to save for your child’s college education. Here are two calculators that we at Bright Horizons College Coach like to use: the College Board’s college savings calculator, and the “World’s Simplest College Calculator” on www.savingforcollege.com.
The danger of using one of these calculators is that the numbers can seem so unattainable that you give up before you start. When you look at today’s college costs (the College Board calculator conveniently provides averages for different sectors), and estimate they will rise 3-4% annually for the next 8-10 years, the results look astronomical. But don’t panic— you don’t have to save for the entire cost—many students receive partial scholarships, and as I mentioned in the first part of this series, you’ll very likely be able to pay some costs out of pocket when the time comes. There will also be financing available at your student’s college. The point of saving now is to minimize the use of loans later, for both you and your child.
As you set your savings goals, it’s inevitable that you will have to look at your budget and figure out how much you have available to put aside. Don’t have a budget? It’s time to create one. Track spending for a month and find places where you can cut expenses to create savings opportunities. Set limits for discretionary categories and stick to them. Look for extra cash wherever it appears, such as in the fall, when child care expenses drop as the kids head back to school.
Do you feel like your kids are over-booked and over-scheduled? Other line items in a budget are not unlimited, and extracurricular activity fees shouldn’t be either. Be willing to take the time to step back and make thoughtful decisions about which activities are important and valuable. In this process, you might identify some resources that can be directed to college savings, not to mention an evening or two of family time spent at home and not in a car.
Another great opportunity for saving is when kids receive cash gifts for birthdays or other holiday celebrations. Rather than allowing your child to spend the whole check, send a portion of it into college savings. 529 College Savings Plans work well for this. In a nutshell, here’s how they work:
An account is set up with one owner (usually called the participant) and one beneficiary. Post-tax dollars are added to the account and the money grows, tax-deferred. The earnings remain tax-free as long as the funds are used for qualified educational expenses at an eligible institution. An eligible institution is one that participates in federal financial aid programs—in other words, practically every school in the U.S., as well as a fair number outside of the U.S. The plans are administered by individual states and you are free to use any state’s plan, as most do not require resident status to enroll. A great resource to use to shop around and compare plans is www.savingforcollege.com.
If the original beneficiary decides not to go to college, or gets a full scholarship, it’s simple to change the beneficiary to any immediate family member of the original beneficiary. And most of these plans make it easy for others to make direct contributions to the account. If it works better for your family, it’s also easy for grandparents and other relatives to open their own plan for your beneficiary—a win-win situation!
Finally, if you’ve heard rumors that saving for college will hurt your child’s chances for financial aid, ignore them. As long as you save in the parents’ name (and 529 Plans are considered a parent asset), the impact on your student’s eligibility is minimal. The formula that determines eligibility for aid relies primarily on parent income, and parents are generally shocked at how high that calculated contribution from income is. Saving now will help you to afford what you will be expected to pay later—it’s that simple. So good luck and happy saving!