Anyone with young children knows that kids are both a blessing — and a cost. From diapers to day care and tater tots to toys, the day-to-day expenses of a growing family can add up fast.
According to the USDA Opens in new window, middle-class parents are looking at nearly a quarter million dollars to raise a newborn. But when you add in the potential cost of college, you could be seeing double. And although the day your little ones first step onto campus may feel like a lifetime away (especially during those early sleep-deprived years), starting to save now may be the best thing you can do — for yourself and your kids.
If you haven’t shopped colleges lately, prepare for sticker shock. For the 2019–20 school year, the cost of attending Opens in new window a private college averaged $53,980. For public schools, typical in-state students could face a $26,590 bill. And if a student went public but came from out of state, add around $15,000 to that price tag.
The good news: Those are “rack” rates. Everything from scholarships to loans to housing choices can cut the actual “net” price you pay by $10,000 a year or more. The bad news: Those are the current costs — and both the sticker and net prices are headed in only one direction.
Saving is never easy. Saving for college may seem like gargantuan goal. But remember the proverb: “How do you eat an elephant? One bite at a time.” Putting away even small amounts now can help make a sizable dent in your child’s college bills later. Here are three ways to approach it.
Invest through a 529 plan
Named for a section of the IRS Code, state- (and sometimes institution-) run 529 savings plans hold unique advantages. First, you get a wide array of investment options. Next, the money you invest grows tax deferred — and withdrawals are federal tax free if you use them for “qualified education expenses Opens in new window.” (Many states offer their residents tax breaks on 529s too.) Thanks to the power of compound interest, that could be a big advantage if you start investing early.
But if the thought of investing scares you as much as a toddler having a temper tantrum in a crowded restaurant, fear not! Many 529 plans offer an age-based option: You specify the year you expect your child to start college, and your money goes into a diversified “target-date” fund whose investments automatically grow more conservative as that year approaches.
What if your kid’s plans for college change? 529s also let you switch the account to a different beneficiary (a sibling or even a spouse). The tax law has also become more flexible through recent legislation so that the funds can be used for K-12 education or to repay student loans (each with limitations on amounts). (Worst case: You can withdraw for any reason and owe income tax on your earnings, plus a 10% penalty — or 12.5% if you live in California.)
Bonus: You won’t know exactly how much college will cost until you get there. If you end up with more money in a 529 than you’d needed, thanks to the new federal SECURE Act you can use the funds to help your child pay off student loans.
To help your 529 account grow, ask grandparents and other relatives to consider 529 contributions in lieu of gifts. They can open an account in their own name or contribute directly to the plan you’ve already established.