With a year at the average in-state college costing 41% of median household income, most Americans don’t earn enough to pay for postsecondary learning from their monthly paychecks. But as master-investor Warren Buffett says, “Never depend on a single income, make an investment to create a second source.”
Postsecondary costs increase every year, so start investing as soon as possible. The longer your money’s invested, the greater it’s future value can be thanks to dividend and interest earnings.
Even if you could only invest $100/month at 1% interest beginning when your child’s born, you’ll have over $27,000 for college when that child turns 18. Unless you have big dollars to invest and save, your accounts won’t pay all postsecondary expenses, but they’ll reduce what you and your child need to borrow for those expenses.
There are several postsecondary saving and investing options. Here are some of the more popular:
- 529 Plans: All states offer tax advantaged savings or prepaid tuition programs so parents, grandparents, others can help designated “beneficiaries” pay their educational expenses. Look here for more information.
- Bonds, Stocks, and Mutual Funds: Most people use professionally managed mutual funds to invest in bonds and the stock market. Prospectuses are available on these products to disclose key details about them. Read these carefully before investing.
- Certificates of Deposit: CDs and their fixed rates of return are federally insured and so very safe. But returns are low, and taxed like other income, and there are penalties if you withdraw funds early.
- Coverdell Education Savings Accounts: Coverdell ESAs are open to those with Modified Adjusted Gross Incomes (MAGIs) below $110,000 ($220,000 if married filing jointly). Money in them grows tax free and can pay $2,000 per year of each designated beneficiary’s Qualified Education Expenses.
- Education Savings Bonds: Series EE savings bonds are safe, reliable, and government backed. They can be bought for $25 to $10,000. Their rates of return are very low, but the interest they earn is tax-free for investors with MAGIs below $99,250 ($146,300 if married filing jointly).
- Savings Accounts: Regular savings accounts are federally insured up to $250,000 so they’re incredibly safe. Interest earnings are low, fixed, and taxed. But with no withdrawal penalties, the money’s available whenever needed.
- Roth IRAs: The up to $6,000 or $7,000 per year you put into a Roth IRA is taxable, but the money you take out isn’t as long as it’s been there five or more years and you’re at least 59.5 years old or you use it to pay you or your dependents’ tuition, fees, books, and educational equipment.
Will investing cause your student to lose out on financial aid? Maybe. But student grants cover just 10% of college expenses, with family income, savings, and student loans paying the rest. And investments hurt aid eligibility far less than earned income during the postsecondary years.
Don’t use money you need for basic necessities, emergencies, retiring high-interest credit card debts, or retirement to invest for college. But see your banker or a financial advisor about how to invest as much as possible today and minimize postsecondary debt tomorrow.
Investing and saving is important, but it’s just one of several strategies for your Pre-College Finance Plan that we’ll cover this fall. Become a follower of this website to access an article on new strategies every Wednesday between now and mid-December!