"What lies behind you and what lies in front of you pales in comparison to what is inside of you"
Ralph Waldo Emerson
College funding is an important part in the future of your child. The cost of a college education rises as the years go by. Here are some data of how much college costs:
The average in‐state tuition and fees in a public four‐year Institution is $9,970 in 2017-18. The average total tuition, fees, room and board charges are $20,770
The average out-of-state tuition and fees at public four-year institutions is $25,620 in 2017-18. The average total charges are $36,420
The average tuition and fees at private nonprofit four-year institutions is $34,740 in 2017-18. Average total charges are $46,950
The average in-district tuition and fees at public two-year colleges $3,570 in 2017-18
On average, you are looking to spending from 9K to 34K per year! You got that right! But do not despair. There are some solutions out there but the key is to plan and start early. Fortunately, there are college plans called 529 under the IRS designation, which are meant to grow over time and help offset some of the cost.
You should also take advantage of whatever grant or scholarship your kid can get. If this happens and for some odd reason you end up with money after your kid has finished college, you can give the rest of the money to another child or you can take the tax hit and use the money.
In some states, the contributions can be tax deductible. Explore Vanguard's calculator and see whether your state qualifies. 529's can be used for high school as well.
There are a number of companies or brokerage firms which offer different funds. One of my favorite brokerage firm is vanguard. They offer a variety of low cost funds.
If you wonder whether the money will be invested in the stock market, the answer is yes. If your next thought is about losing the money, think carefully and rationally. Short answer is, a 529 college fund is your kids best chance in affording a degree and not be burdened with debt after they finish college like me and my wife.
I would caution all to know what inflation is. Inflation is working against you (and me) as we speak.
Putting the money in a savings account, CD, etc. is no longer an option. Over the long run, you will not generate enough money through interest to beat inflation.
Remember, the money will grow until your child goes to college; an average of 12-14 years if started early.
Within the 529 college fund, you have the choice of how aggressive you want to be with the investments. Let me explain.
To keep it simple, there are 2 types of investments:
- Stocks - you own a piece of the company. If the company does well you do well and vice versa.
- Bonds - you lend money to a company or government which will be paid back with interests.
Stocks will usually provide the higher gains but also the risk to biggest changes in value or losses.
Bonds are more stable and usually will not provide the gains seen in stocks.
When your child is young, you should have most of the investment in stocks as that money is not needed now. As your child gets closer to college age, the investment should lean more on bonds or a safer approach. These investments firms have also what are called target funds, which adjust the ratio of stocks to bonds according to the age of the child, this is a reasonable option.
Bottomline, whatever you do, starting a 529 for your child should be on your radar along with your prenatal vitamins. The earlier the better. He/she will thank you someday.
Till next time.
Created on 8/2/2019
Revised on 6/2021
Disclaimer - This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, should not be treated as such.