SPARTANBURG, S.C. (WSPA) – In-state tuition for public universities has jumped by 79% in the last 15 years, according to data from U.S. News Best Colleges rankings. That reality can really be a gut punch for parents who are struggling to save for college.
When your child is still in diapers, like Savanna Lima’s two kids, it’s hard to think 18 years into the future.
“So just yesterday me and my husband brought up the fact that we haven’t started a college fund for Jet or Blakely yet, so just the idea was thrown out there, so we’re hoping this year we can put some money aside,” Lima said.
Certified financial planner Beau Shuler, the owner of Alliance Wealth Partners in Spartanburg, said that is a very smart move.
“The importance of starting early is critical,” Shuler said.
Shuler said if time is money, that’s never more fitting than saving for college.
The reality is college tuition is going up at twice the rate of inflation. So, while today the average in-state public school tuition is $16,000 a year, in 18 years that will be more like $80,000.
Online calculators like this one can help you figure out how much you will need.
To counter inflation, Shuler said you must take advantage of compounding: More time means less money grows faster.
“The amount you have to save because you don’t have that period of compounding and you have fewer years is incredible, it’s much different. So, investing $100 a month beginning when the child is born for 18 years may come surprisingly close to waiting until the chld is in high school and putting in $1,000 a month for just the last 4 years,” said Shuler.
There are also online compounding calculators that can show just how far your dollar can stretch when you invest early.
“The biggest question is how to get the most out of putting in the least?” asked Lima.
What is a 529 College Savings Plan?
The 529 College Savings Plan is designed for education. Withdrawals can be used for things like college tuition, room and board, grade school tuition, and even to pay off some student debt.
The advantage is they have two major tax benefits, that can stretch your savings.
- You can deduct contributions in most states against your state income tax.
- The earnings grow tax free, but you have to use that money for education.
“So in SC if you’re putting $10,000 in, 7% tax bracket, you’re actually saving $700 in state taxes,” Shuler said.
What about a ROTH IRA?
“Would a ROTH IRA or a savings bond be an idea for him?” asked Lima.
ROTH IRA’s are investment accounts designed for retirement that grow tax free (like 529s), and they don’t have the education requirement.
IRAs normally have a 10% penalty for taking money out before age 59, but that is waived for education expenses.
An advantage to a ROTH over a 529 is that it won’t count against the child when it comes to getting financial aid (at least for the first two years after a withdrawal).
However, the ROTH has a much lower yearly contribution limit of $6000 before age 50, compared to $16,000 for the 529.
And any earnings that are withdrawn for education (before the age limit) are taxed.
Shuler leans towards the 529 for college but also values a combination approach. He said parents can avoid having a 529 count against you when it comes to getting financial aid by setting up or transferring the 529 into a trusted extended family member’s name like a sibling or grandparent.
Either way, it is that early timing that matters most.