Whether your child is still a toddler or about to start high school, planning for his or her future education is essential. The cost of college tuition and related expenses will likely rise and preparing for these costs could reduce the sticker shock later on. By saving for college early through a savings fund, you can make sure your children will get the education they need to be successful.
Look into a 529 Savings Plan
There are special savings accounts you can use to pay for future college expenses. These are known as 529 plans, which are divided into pre-paid tuition and college savings plan options, according to the U.S. Securities and Exchange Commission. Depending on which 529 plan type you choose, you could have contributions each year to help cover the future costs of higher education for your children.
Use a College Fund Calculator
To determine the amount of money you may need to pay for your children's education consider using a college fund calculator, such as the one provided by the Financial Industry Regulatory Authority.
For example, if:
- Annual college costs: $30,000
- Current savings: $5,000
- Years until enrollment: 15
- Annual return: 5 percent
- Number of years enrolled: 4
- Inflation rate: 3.8 percent
Then your annual contribution to a savings plan would need to be $7,429.50 to cover the future costs.
To use a college fund calculator, follow these steps:
Determine your children's annual college costs. Estimate the amount of money tuition, books, room and board and other factors may add up to for each year your children will go to school. If you have one child who is going to a private university where costs are $30,000 each year, you could input this for annual costs.
Current savings. Add up any savings you already have in your children's existing college fund.
Years until enrollment. This is the number of years until your children will enroll in college. If your child is three years old, it may be 15 years until he or she is ready for higher education. This is also the amount of time it will take for you to save.
Annual return. Your college savings fund is often treated as an investment that will yield some kind of return. The calculator should include the expected net-of-tax return.
Number of years enrolled. Determine how many years your child will be enrolled in college for the entire time he or she will be a student. Typically, it will take four years for a student to complete his or her studies. However, this could vary depending on their course of study and other determinants that could affect graduate time.
Inflation rate. During the time you save, inflation may affect the value of the money in your account. Consider the average annual inflation rate during the time you will use to grow your savings. In the example, the average inflation rate per year will be 3.8 percent for the 15-year period you save for the college fund.
Find annual contribution. Use all of these inputs to find the contribution amount you will need each year to meet your goal of paying for tuition and other costs based on the savings rate and inflation.