To meet your goal for funding a child’s college education, you typically need to develop an investment plan. One of the more important factors is your child’s age:
Children aged 10 or younger — With eight or more years until college, you should be able to fund your child’s education by setting aside reasonable sums. Since inflation can have a major impact, consider investments with higher return potential. Your long time frame should give you time to overcome any short-term setbacks while keeping ahead of inflation.
Children aged 11 to 14 — With four to seven years until college, you may want to select more conservative investments. If you are just starting to save now, you may find the needed amounts quite large. However, start saving so you’ll have some funds accumulated by the time your child enters college.
Children aged 15 to 18 — At this point, continue switching to more conservative investments as college quickly approaches. If you are just starting to plan for college now, it may be very difficult to save the large sums needed in such a short time. Investigate the financial aid process to see if you’ll qualify for aid and research your borrowing options. Other items to keep in mind when developing an investment strategy include:
Start investing as soon as possible. This can have a huge impact on the amount you need to save on an annual basis. For instance, assume you intend to send your newborn to a public college that currently costs $27,000 per year, the average cost of a public university (Source: Trends in College Pricing and Student Aid, 2021), with expected increases of 3% per year. After 18 years, you would need $184,000 to pay for four years at a public university. If you start saving now, you’ll need to save $4,913 per year to reach that goal in 18 years. Waiting until your child is age five increases your annual savings amount to $8,560 for 13 years. Start saving when your child is 10 and you’ll need to save $17,299 a year for eight years, while the amount grows to $56,678 a year for three years if you wait until your child is age 15. (These figures assume an after-tax rate of return of 8%. This example is for illustrative purposes only and is not intended to project the performance of any specific investment.)
Look for tax-advantaged ways to invest. If your earnings are tax-deferred or tax-free, you could end up with a much larger balance than if you had to pay taxes on earnings over the years. Take a look at section 529 plans and Coverdell education savings accounts, both of which allow tax-free distributions as long as the proceeds are used for qualified education expenses. Investigate these options thoroughly, however, since various qualifications and restrictions apply.
Select investments that allow periodic contributions. You may want to make contributions on a weekly or monthly basis, so select investments that allow small contributions. You may also want the ability to automatically transfer funds from a checking or savings account to your college investments.
Adjust your investment mix over time. As your child gets closer to college age, start moving investments from more aggressive ones with higher return potential to more conservative ones that will help protect your principal. This can help protect your investments from a major downturn that may occur right before your child enters college.
Review your progress annually. Review your investments at least annually so you can make any necessary adjustments. You may decide to change investments or increase the amount you are saving on an annual basis. Please call if you’d like help with your investment plan for your child’s college education.