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As you’ve likely noticed, the cost of college continues to skyrocket. The cost of college is expected to inflate about six percent per year, meaning babies born this year could see public college costs close to $54,000 per year for tuition, fees and room and board in 2035.
When it comes to saving for college, many clients ask me how much they should plan to save, but it really depends on the individual family and their financial situation. Some families may only be able to contribute a small amount to college costs, in which case, the college student will have to look at other ways to pay like taking out loans or getting a part-time job. Other families might consider paying for tuition, but have their child pay for books or room and board.
The key to saving is to start early. Typically, $100 each month is a good place to start. Cutting out things like regularly going out to eat or getting a morning coffee could free up more money for saving and allow you to reorganize your monthly budget.
Many investment vehicles are available to help fund higher education. One of the most recognizable options is a 529 college savings plan. Officially known as a Qualified Tuition Plan, this tax-advantaged investment vehicle is designed to help families pay for college and graduate school expenses when they are needed in the future. The two types of 529 plans include a college savings plan and prepaid college tuition, both of which are generally sponsored by state agencies.
Your child’s college education is an investment that will pay dividends for years to come. Holding off on developing a savings plan that works for your family could make paying for college much harder later. Last year’s graduates will be the most indebted yet, owing an average of $35,000 per person. Think of it this way: you can pay yourself interest or you can pay the bank interest. If you invest now, you are earning on your assets. If you borrow later, you are paying the bank. It is the power of compounding your money. The money you put away has the potential to grow dramatically over the next 15 years.
Not enrolling in a college savings plan may also mean missing out on the tax advantages associated with certain education savings accounts. With any 529 savings plan, the money that you invest will grow without being subject to federal income tax. You’ll also avoid paying federal income taxes on any money that you take out of the plan if you use it to pay for qualified educational expenses, such as room and board, tuition and books. A tax advisor should always be consulted when considering an investment in a 529 plan so that you fully understand all of the associated tax benefits and implications.
Ultimately, 529 plans are a great vehicle for progressively saving to prepare for growing college costs. In addition, creating a long-term savings plan could allow your child more financial flexibility to decide on an educational institution that will best foster his or her academic and personal growth.
Shelley Ford is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Denver. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney, LLC, member SIPC.