Saving For College
Budgeting for Your Child’s Education
Right now, you may be planning for diapers and daycare, but it’s not too early to start planning for college. Paying for your child’s college education is one of the biggest expenses a family will incur during their lifetime. But saving even a little bit regularly can expand the options available to you when it comes time for your little one to select a college, and for your family to make a plan to pay that tuition bill.
The good news is that you’re not alone: more and more families with babies and young children are starting to save for college. In fact, a recent study conducted by MEFA (Massachusetts Educational Financing Authority) and Fidelity Investments, found that over 40 percent of parents with pre-schoolers have a college savings account, while only 28 percent parents of older children are saving.
These parents have the right idea. Because interest compounds over time, the more years you are actively putting away money for college, the more your investment will start to add up.
Consider this: You could save $58 per month over ten years, and you would invest about $6,960. At 7 percent interest, you’d amass $10,000 by the end of those ten years. If you borrowed the full $10,000, you would pay an additional $3,920 in interest and your monthly loan payments (at 7%) would be around $116 for 10 years.
The amount you save isn’t as important as saving what you can, when you can, as often as you can.
Ready to get started?
There are a variety of tax-advantaged college savings programs such as 529s, prepaid tuition plans, Custodial accounts like UGMAs and UTMAs, and Coverdell Education Savings Accounts, and many college savings plans may be set up even before your baby is born. Two of the most popular ways to save for college in Massachusetts are the U.Plan Prepaid Tuition Program and the U.Fund College Investing Plan.
Prepaid Tuition Program
The U.Plan is a prepaid tuition program that allows participants to lock in tuition and fees at 80 participating Massachusetts public and private colleges. Each spring, parents across the Commonwealth make their annual investment in the U.Plan. Their contributions purchase tuition certificates that represent a certain percentage of tuition at the participating colleges and universities. For example, a $1,000 investment may represent 10 percent of tuition at a public college this year. By the time the benefiting child attends college, that 10 percent of tuition could be valued at $1,500. For a $1,000 investment, the return is $1,500.
Families may invest up to 100 percent of the cost of tuition and fees at the participating colleges and universities. The U.Plan is not subject to the volatility of market-based investments. It is a safe investment that protects the principal investment, and for Massachusetts’s families the U.Plan is state and federal tax-free. The minimum annual contribution to the U.Plan is $300, an average of six dollars per week.
College Investing Plan
The U.Fund is a market-based 529-investment plan that lets families invest in portfolios of mutual funds with professional investment management by Fidelity Investments. You may choose an investment option based on your child’s age, or tailor your strategy based on your risk tolerance, or customize your U.Fund account by choosing your own portfolios.
The money in your U.Fund account may be used at any accredited college or university in the United States and some eligible foreign institutions. Your savings can be applied to a wide range of qualified education expenses, not just tuition and fees. If one child doesn’t use the money, you can change the beneficiary to another eligible family member of the original beneficiary.
Start Saving
You don’t have to choose just one way to save for college. Many people choose more than one savings option.
There are lots of reasons why people delay saving for college. Finances are tight. They are counting on scholarships. Some think saving will hurt their chances of getting financial aid. And though your assets are considered in determining financial aid eligibility, income is the biggest factor in calculating the family’s contribution to college costs.
With all the financial pressure on families today – mortgage payments, unemployment, retirement savings, grocery and utility bills – it's little wonder the thought of saving for college makes parents uneasy. However, if you sit down and make a plan to save, you can do it.
Once you choose how you’ll save for college, follow these tips to keep yourself on track:
- Encourage contributions to your child’s college savings account for baby showers, holidays and birthdays.
- Add saving for college to your regular budget, and set up automatic transfers to a dedicated college savings account.
- From time to time, re-evaluate your savings strategies and set clear goals that you can attain within your particular timeframe.
- If you receive a bonus, tax refund or other unscheduled income, consider setting a portion of it aside for college.