Junior's on his way to UCLA! How to save for your child's college education
Parents of one child or unusually affluent parents have an opportunity to provide children with the chance to attend the college of their dreams, but, the expense is so great, prudent planning is required even for affluent families.
If you are a parent to only one child (or you have a very large income and two or more children) you have an opportunity to prepare to send your child to an elite university. These schools are beyond the reach of many families, but in your circumstance with planning and preparation you can count on sending your child to the school of her choice — regardless of cost.
A few schools, including Princeton and Harvard, offer zero cost admission to students from low-income families. Under these programs, students do not even pay for room and board and receive the same education as affluent families. Significant numbers of students participate in these programs. These schools also offer discounted tuition and fees to lower-middle income families. The tiers and thresholds for these programs will certainly evolve during your child’s growth from today through admission to college.
If you are likely to find yourself paying for a substantial part of the bill to send your child to one of these elite schools, let’s talk about how you can do it. Even for affluent families, paying the bill without incurring significant debt can be a challenge. For a child born in 2013, the total cost of a four-year college education at an elite school will run about $300,000. Here is a model for preparing yourself.
To accumulate $300,000 before your child starts college will require you to save about $860 per month starting the day she is born. (If you can start before — maybe long before she is born you can reduce that amount).
Use a 529 Plan
In order to avoid paying any tax on the earnings in your college savings account, be sure to put your savings into a 529 plan. Plans are sponsored by states or by colleges. Choose a plan sponsored by a state that will allow you to invest with the maximum flexibility and use the money for any college in the country.
The estimate of savings above assumes that you earn about 5 percent per year on your money. If you checked the interest rates on bank deposits lately, you know you can’t earn that much in a risk-free investment. You’ll have to invest in mutual funds or other similar assets that tend to grow at a rate of about 5 percent per year, but without any guarantees. Mutual funds that invest in medium term corporate bonds are good candidates. Be sure to choose funds with low costs: no loads, no commissions and a low expense ratio.
It is tempting to seek to reduce your monthly savings by investing in riskier assets like stocks and real estate. That just might work out; the problem, of course, is that it may not. If you save up for several years, take your money and make the down payment on a duplex with 15 years to go before college, hoping to sell the condo to pay for school, you run the risk of arriving at high school graduation in a poor real estate market unable to convert the duplex to cash and not having achieved enough appreciation to pay for it. If you use a risky plan to fund college, recognize that your retirement savings may need to be the Plan B for paying for college.
Saving this kind of money for your child’s education is a daunting challenge, but if you are committed and successful you can give your future student an education that will set her on a path with amazing opportunities unburdened by student loans.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.