According to the Bureau of Labor Statistics, today's median
bachelor's degree recipient receives $1,281 in weekly earnings
compared to the $749 made by a typical high school
graduate.1 Clearly, one of the best investments you can
make for your children is an investment in their educational
future.
You may think that setting up a bank savings account for your
newborn's education will get him or her off to a great start. You
might, however, want to think again. According to 2019 data from
the College Board, the projected average cost for your newborn's
four-year degree at a public college could total over $274,000. You
would have to sock away over $11,000 per year in a savings account,
assuming it earns interest at an average rate of 3% per year, to
equal that almost by his or her freshman year. And should your
child decide to attend a private college, the total could be over
$622,000.2
But don't despair yet. Even without time on your side -- if your
children are teenagers, for example -- a sound investment strategy,
coupled with knowledge of other college financing options, may put
your children on the road to a valuable four-year college
degree.
| Projected College Costs |
 |
Assumes a 6% annual increase and current one-year cost of a
four-year public ($21,950) and four-year private ($49,870)
college.
Source: ChartSource®, DST Retirement Solutions,
LLC, an SS&C company. Based on data published by the College
Board for the 2019-2020 academic year. Chart is based on
hypothetical growth rates; your results will vary. © 2020
SS&C. Reproduction in whole or in part prohibited, except by
permission. All rights reserved. Not responsible for any errors or
omissions. (CS000113) |
A Sound Strategy
As with any large financial goal, it's good to start investing
early and often for college. First, set your goal: figure out how
much you will need to save for each child based on his or her age
(see accompanying chart). Then, develop an investment plan and
stick with it. Consider discussing the following guidelines with
your financial professional when developing your plan.
Goal: Final Tuition Bill Due in 12 to 22 years
With time on your side, your portfolio can potentially withstand
a bit of volatility in your quest for higher returns. Stocks have
historically provided the greatest long-term growth potential. Of
course, past performance can't guarantee future results. You must
remember the volatility involved in stock investing and consider
your ability to wait out potential fluctuations in the value of
your child's college investments.
Goal: Final Tuition Bill Due in 8 to 11 Years
In addition to keeping your portfolio aimed toward growth with
stocks and stock mutual funds, you might want to add or increase a
fixed-income element to balance risk. Also, now is probably a good
time to teach your child about investing -- by encouraging that a
portion of the dollars earned through paper routes and babysitting
be contributed to the college investment plan.
Goal: Final Tuition Bill Due in Less Than 8 Years
You may start allocating more of your portfolio to fixed-income
and money market investments. If you have virtually nothing saved,
you have a challenge ahead of you, but some cost-cutting in other
areas of your life might allow you to make substantial monthly
investments. The less you have saved, the more you may need to be
aggressive in your investments in seeking higher returns, as long
as you have the appropriate risk tolerance.
Considerations
Although many investments, including stocks and bonds, have
traditionally outpaced savings accounts in terms of performance,
past performance cannot guarantee future results. Bear in mind that
unlike savings accounts, investments are not insured by the Federal
Deposit Insurance Corporation (FDIC); therefore, your investments'
value may fluctuate a great deal over time and could even result in
a loss. Also remember that any investment plan needs a fresh look
every year or so to determine if adjustments need to be made.
Generally, changes should be made as your time horizon narrows, the
day nears when you will send your child off to college, and
preservation of principal becomes a primary concern.
Other Financing Options
Beginning your investment plan by considering the time frame
available to you is probably your best bet in seeking to meet
college costs. In addition, consider these options:
- Encourage savings gifts: When relatives ask
what your children want for birthdays or holidays, encourage gifts
that will help finance their education. Though it may not be a
child's first choice now, they'll thank you later. Such gifts
include Series EE Savings Bonds; shares of a mutual fund given
through the Uniform Gifts/Transfers to Minors Acts (UGMA/UTMA); and
zero-coupon bonds that mature in a given year around college
enrollment. Parents or others can contribute up to $2,000 annually
(per child, and if certain income restrictions are met) to a
Coverdell Education Savings Account (formerly called an Education
IRA) where any earnings can accumulate tax free and withdrawals can
be made federal (and possibly state) income tax free for qualified
education expenses. An individual can make annual gifts of up to
$15,000, gift tax free, to a minor under UGMA/UTMA. And friends and
family can pay any amount directly to a youngster's college for
tuition and fees, with no gift tax consequences. Remember to brief
yourself on the tax considerations of each of these gifts (and
speak with your tax professional) so you're not caught off guard by
Uncle Sam.
- Section 529 plans: These state-sponsored plans
allow individuals to invest in a predetermined investment pool and
offer some flexibility on when you can contribute. Withdrawals for
qualified higher education expenses and tuition at an elementary or
secondary public, private, or religious school, are federal income
tax free. Withdrawals may also be free of state income taxes for
residents of states that allow this benefit.
- Apply for financial aid: Each year, there are
millions available in financial aid from a variety of organizations
and scholarship funds. Even if you think you're ineligible for
financial aid, complete the applications and mail them in on
time.
- Don't rule out less expensive schools: Public
universities and community colleges can be among the best options.
Higher education is certainly one area where most expensive does
not necessarily mean best.
- Develop networks and ask questions: High
school guidance counselors, religious and civic organizations, and
the colleges your child applies to can all provide good leads for
additional sources of scholarships, grants, and loans.
Together, time and a smart investing strategy can help you meet
the rising costs of higher education. Combine that bet with a
little creativity and a lot of information, and you can help
provide your children with an investment that no one can take away:
a college education.
