Back in the day, people could get a candy bar (a decently sized one, too) for $0.50 without a sale. They could get gas for under a $1 a gallon at one point, and bread and eggs were easy to find for a buck, as well. Oh, how things have changed. Today, the dollar simply doesn’t stretch as far as it used to, and that means you and your child have to do some fancy finance footwork to save enough for her higher education.
Is Inflation All That Bad?
Although all things get more expensive over time, education inflation outpaces the typical inflation rate for most other goods or services. This means that academic costs likely will be more challenging for the next generation of higher education students to cover. For example, Savingforcollege.com asserts that, based on figures from The College Board, a student enrolling in 2010 paid an average of $119,400 over four years at a private college, $33,300 at a public college (in state), and $68,800 for two years at a private college and two years at a community college. The College Board Projects that a student enrolling in 2028 will see costs of $340,800, $95,000 and $196,300 for the same services.
How Much and When to Save
Given the figures suggested by The College Board, assuming your child isn’t eligible for financial aid or scholarships, if your child wants to go to private school, he’ll have to come up with about $20,000 for each year he’s alive for private school, $5,500 for public college (in state) and $11,500 for a combination of public and private schooling. Now, think realistically. Your child likely won’t get a job until he’s a teenager, especially given child labor regulations. That means you have to start saving on your child’s behalf, and that it’s never too early to start building an educational nest egg.
One of the best savings options for your child’s education is a 529 plan. These plans come in two major types. The first allows you to invest money into various commodities such as mutual funds. If the investments do well, you can make a significant return. The second option allows you to prepay for college costs, locking in fees at their current rate. No matter what option you pick, 529s usually are transferable, meaning you can move them around from child to child and even institution to institution. You even can use them yourself if your child ends up not needing it.
The next best savings choice for kids for education are bonds. Bonds from the government are backed by the U.S. Department of Treasury and therefore are considered a fairly safe investment. The interest isn’t spectacular, but you’ll be able to teach your child to set money aside and can track it fairly easily. You also can have your child buy bonds that will mature at specific times, ensuring there is money available for all four years of college.
Another good option for saving for your child’s education is to hit the stock market. This not only teaches your child how the stock market functions, but also provides the opportunity to explain that it is better to take some risks early on when losses still can be regained. There is no right or wrong way to invest here, but ideally you and your child should select stocks that you can leave go for a while, simply because it can be too overwhelming to be checking stock prices every day. That may mean investing in well-established companies.
Of course, you don’t have to stop there. You also can investigate Roth IRAs, custodial accounts, trusts, Coverdell Education Savings Accounts and basic bank savings accounts. Which investment is “best” is highly debatable, but as long as you save something, it’s a move in the right direction for your child.
JFH Innovative LLC. (2012). The Real Cost of Higher Education.
Retrieved May 11, 2012