Investing for the Future: How to Save for College

July 31, 2015

With the cost of a college education rising faster than inflation, the need to save efficiently for the future has become increasingly important. While it is impossible to know what lies ahead, based on current trends the cost of sending your children to an institution of higher education could be quite large. According to the College Board, the organization that provides college entrance exams, college costs at present range from $16,325 a year for public two-year colleges to $46,272 for private four-year institutions:

 retrieved from: https://secure-media.collegeboard.org/digitalServices/misc/trends/2014-trends-college-pricing-report-final.pdf.

 

If you consider inflation (historically 6% for higher education costs), those same costs projected outlook a little something like this:

retrieved from: https://investor.vanguard.com/college-savings-plans/average-cost-of-college

 

At $121,078 a year, you’ll need to save $484,312 to send your infant to a private college 18 years from now. While it may be easy to cross your fingers and hope your child will grow up to be brilliant and receive a handsome scholarship, we strongly suggest considering the following back up plans for saving for little Jimmy’s dream school… just in case.

 

Start Saving Now

 

Just like saving for any other long-term goal, the earlier you start saving for college the better. By starting early you allow yourself a longer time horizon for your initial investment to grow, which, thanks to compounding, allows your investment to earn more than if you start saving just a couple of years before.

 

Save in a 529 or ESA

 

There are several types of educational savings accounts that provide tax benefits when used correctly. The most common and arguably the easiest to use are 529 accounts and Education Savings Accounts (ESAs). These two types of accounts allow you to save for higher education without having to pay taxes on the investment gains. The rules are slightly different for each:

 Take Advantage of Tax Deductions for Higher Education

 

If your child has already started college, make sure to take advantage of education credits when tax time rolls around. Both the American Opportunity Tax Credit and the Lifetime Learning Credit offer tax breaks for individuals paying tuition at eligible institutions. To learn more about education credits and how they may apply to your situation, check out this FAQ page: http://www.irs.gov/Individuals/Education-Credits:-Questions-and-Answers.
 

If you’d like to learn more about setting up a 529 or ESA account to start saving for the future, feel free to contact us. We’re here to help.

 

“What’s the average cost of college?” Vanguard. Retrieved from https://investor.vanguard.com/college-savings-plans/average-cost-of-college.

 

“Trends in College Pricing 2014.” College Board. Retrieved from https://secure-media.collegeboard.org/digitalServices/misc/trends/2014-trends-college-pricing-report-final.pdf.

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