Aside from saving for retirement, parents often say saving for their child’s college is one of their biggest financial goals. But it’s not easy. The cost of college tuition has been rising faster than the rate of inflation for more than two decades. According to the College Board, in-state tuition at public four-year colleges in 2012 averaged $8,900, while tuition at private universities and colleges averaged $30,100. Tuition at public universities has risen dramatically since 2000, when state governments started reducing taxpayer support for colleges. Saving for college has always been a challenge for many parents, but if the trends continue, it’s going to be even harder in the future.
Most parents know they need to start saving early and regularly, but unlike with retirement, many don’t consider the type of underlying investments they hold in their child’s portfolio. There’s an array of 529 plans and fund options available and experts say parents should carefully weigh the holdings, asset allocation and glide path.
Mari Adam of Adam Financial Associates in Boca Raton, Fla., says parents should think about those college savings almost the same way they would think about their retirement. They’ll want to do their best to save as much as possible and ensure their money is working as hard as it can for them. At the end of 18 years of saving, most of the money will come from growth, and investment options can make a big difference. Consider if a parent saved $200 per month from the time their child was born until age 18 and yielded an average of 6%, they’d have almost $100,000 from only $54,000 in contributions.
“Whether you’re in a 529 plan [or an ESA], you should pay close attention to your investment options and decisions just as you would with your retirement account,” says Adam. “You need the compounding and [growth] to work for you.”
Joe Hurley, founder of Savingforcollege.com, says most 529 plans have anywhere from a few to a couple dozen investment options, ranging from conservative to aggressive asset allocations. Many of these plans have aged-based options that changes the allocation of stocks and bonds as the child gets older. 529 plans are offered in all 50 states, but investors can choose a plan in any state regardless of residence. States typically sponsor the plan, but they’re administered by large investment companies such as Vanguard, Fidelity and TIAA-CREF.