About Those College Costs -- Too Soon?
The birth of a child is a season of fawning over tiny fingers and toes, fretting over which pacifiers to buy, and fidgeting to make the perfect swaddle. But midnight feedings aren’t the only reasons new parents don’t get much sleep. The laundry list of worries can feel as long as the nights are. Among the concerns: money. Not just diapers and formula, either. But “How are we going to pay for this child’s education?” While the question can seem ridiculous for a life that’s only just begun, the numbers tell us otherwise.
Facing the Numbers
The average cost of a 4-year degree has inflated by roughly 5% per year for the last several decades. According to The College Board, today’s average cost of a 4-year degree totals a whopping $134,600. By their estimates, a toddler today will face bills topping $320,000 by the time they’re in school. Such a number can seem fictional until you do the math. Without interest, a parent who starts saving the day their child is born would need to save $17,777 every year to have enough in the piggy bank to cover tuition, room, and board. That midnight fretting doesn’t seem so unnecessary anymore, does it?
Getting Time on Your Side
There’s a big caveat to the numbers above, and it’s an assumption of zero interest. For the risk-averse, such an assumption could be realistic. But for the rest of us, 18 years is likely plenty of time for market fluctuations to balance out. As such, using the 90-year average of the S&P 500, let’s assume a 10% annual return over the long-term. With that taken into account, MoneyChimp’s trusty compound interest calculator shows us that it would require annual investment of around $5,800 to have $320,000 in the bank eighteen years from now.
That’s less than $500 per month, which is still a considerable chunk of change, but less of a shock. Plus, there’s one more factor that could make the investments more realistic: tax breaks.
Taking Advantage of Tax-Saving Plans
Remember this number: 5-2-9. 529 College Savings Plans are special investment accounts that allow parents to save for their kids’ education and get some relief at tax time. Depending on the state in which you live, you may qualify for tax breaks when continuing to, and/or withdrawing from, your 529 account. Funds can be used for tution, mandatory fees, and room and board. The SEC has a helpful FAQ page here.
The bottom line here: it’s never too early to start thinking about college bills. The more you prepare, the more strategic you’ll be able to be regarding tax breaks and special savings plans. Plus, the golden rule of finance is as true as ever: time is your friend.