Many headlines about saving for college are stressful -- tuition rising at rates double inflation, the nation's growing $1.2 trillion student debt (yes, that's trillion with a "t"!), fewer grants and scholarships, etc. Unsurprisingly, 28 percent of parents report losing sleep over college costs.*
But the best way for parents to put aside their college worries, get some needed zzz's and bypass the stress about paying for college is to save for it in advance. Our research shows that every dollar saved ahead of time can equate to almost $2 that won't have to be paid in debt later.**
September is National College Savings Month. And rather than dread college costs and how to cover them, I invite you to celebrate college savings this month and throughout the year.
So what's the best way to celebrate college savings this month and put to bed the stress about college costs? How can you turn pie-in-the-sky savings aspirations into attainable goals? Here are some tips for the year:
First Semester
- Create a plan and get started. Opening a 529 account can be the first step toward maximizing college savings, because 529s provide federal tax benefits and flexibility for college savings that aren't available with most other types of accounts. And they often offer state tax benefits as well. Maybe your goal is to cover all college costs. Maybe it's a specific dollar amount you want to reach. I recommend that families save enough for a "down payment" on college (i.e., enough to cover half the total cost). No matter what, it's important to identify a goal that's feasible for your family and map out what you need to do to accomplish it. To save for all four years at a public college, you might need to save a little over $400 per month for a newborn.*** That number may sound big, but it doesn't take into consideration any large, one-time contributions, say from a tax refund, year-end bonus, or grandparents. The "down payment" model would require less upfront -- about $250 a month.
- Plan a "fundraiser" as a family. Many schools have fundraisers at the beginning of the year. Work together as a family to get the kids involved in fundraising for college. Maybe they will put aside a portion of their allowance or babysitting pay.
Winter Break
- Get friends and family involved. Instead of a gift card, ask friends and family to celebrate the holidays by helping with future college expenses. The value of their 529 contributions will likely far outlast anything they purchased on Black Friday.
Second Semester
- Tutor others. If you've opened a 529 account and are working toward your goal, chances are that you're ahead of the class -- so help others. Strike up a conversation about college savings with your friends and neighbors. Encourage them to hit the books on saving for college and perhaps check out the title Everybody Freaks Out! But It's Going to Be Okay.
Summer Vacation
- Reflect on your success so far and how you're progressing toward your goal. Doing so can help increase your child's confidence in attending college. Seventy-four percent of kids who have frequent discussions with their parents about saving for and attending college are confident that they will attend versus only 46 percent among kids who do not have these discussions.*
Check back in each College Savings Month to make sure you're still on track to meet your goals. For more help on how to get started, visit CollegeSavingsChillout.com.
Please note that a 529 plan's disclosure document includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. You should compare these plans with any 529 college savings plan offered by your home state or your beneficiary's home state. Before investing, consider any state tax or other benefits that are only available for investments in the home state's plan.
*T. Rowe Price's Sixth Annual Parents, Kids & Money Survey.
**T. Rowe Price analyzed how much would have to be saved over 18 years to cover $40,000 in college costs and how much more it would cost to borrow that amount. Assuming the borrower took the loan at the beginning of the first year of college, he or she would pay about $61,000 in current dollars over the next 14 years (four years of school plus ten years to repay the loan), assuming an average annual 8 percent interest rate. The saver would only have had to contribute about $32,000 in current dollars over 18 years, assuming a 6 percent average annual return minus 0.85 percent in annual 529 account fees.
***This assumes an investment return of 6 percent annually. The future cost of college was calculated based on the 2012 total cost for the average 4-year public university education ($19,093) for a family in the third income quartile (annual household income of $65,000-$106,000 in 2012) after the average amount of grants and scholarships for this group was subtracted. The cost was then inflated at 5.5 percent for 18 years. Source for average 4-year college cost: U.S. Department of Education, National Center for Education Statistics, 2011-12 National Postsecondary Student Aid Study.
