Parents should start saving for their children’s college education as soon as possible, since time is their greatest asset.
If a child’s parents start making regular equal monthly contributions to a college savings plan when their baby is born, about a third of the college savings goal will come from the earnings on the contributions. This assumes an average annual return on investment of 4 percent to 5 percent.
If the parents wait until their child enters high school to start saving for college, more than 90 percent of the college savings goal will come from the contributions but less than 10 percent of the college savings goal will come from earnings.
The difference is the equivalent of getting 7 extra years of contributions, just for starting to save sooner.
The parents who wait until the child starts high school will have to contribute about six times as much per month as the parents who start saving from birth, to achieve the same college savings goal.
Nevertheless, it is never too late to start saving for college. Every dollar saved is about a dollar less borrowed. Every dollar borrowed will cost about two dollars by the time the debt is repaid. So, saving for college, even during the year before the student enrolls in college, will save money.
Some families take the advice to start saving for college ASAP a bit further, starting to save before the baby is born. There are two approaches to doing this, since one cannot open a college savings plan account in the name of an unborn child (or even a baby who does not yet have a Social Security number). One involves saving the money in taxable accounts and transferring it to a college savings plan after the baby is born. The other involves starting a college savings plan in the parent’s name and changing the beneficiary to the child after the baby is born.
Copyright © 2019 by Edvisors.com. All rights reserved.