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How Much to Save for Kid’s College Fund

College Fund 529

Having met nurses here in the U.S. who attended Private Nursing Schools costing nearly $150,000 for a Bachelor’s Degree, I fully understand how outrageous tuition fees can be. I’m the first to acknowledge my privilege in graduating nursing school debt-free. I went to a four-year college in the Philippines, where tuition was affordable enough for my parents to send all three of us—myself, my sister, and our adoptive brother—to nursing school without breaking the bank.

Now that I have a child of my own, and while we’re not incredibly wealthy (yet), my partner and I are facing the reality of what college might cost for him in 20 years.

How Much Should You Save for Your Kid’s College Fund?

Well, according to CollegeSimply.com, factoring in inflation, the average cost of a college degree in 2042 (18 years from now) could reach an astonishing $442,697.85, assuming a 7% annual increase in tuition.

Imagine spending nearly half a million dollars for a college degree—that’s bonkers! But on the bright side, we’re having this conversation now, while we still have time. When it comes to investing, time is the most critical factor.

It would take approximately $1,100 in monthly contributions to a child’s education savings account to accumulate that amount by the time they turn 18 and are ready for college. And to be honest, I don’t think we can manage that monthly even as a HENRY Nurse or a Per Diem Nurse.

But that doesn’t mean we, as parents, won’t do anything to prepare for our child’s future. Even with a smaller contribution—say $350 a month—I believe it will make a significant difference and provide options for him. It’s definitely better than nothing.

Types of College Savings Accounts

With the eye watering amount of money to attend college (in the future) in mind, I’ve started looking into options for saving toward our child’s future. There are at least three main types of college savings accounts that you can open early on:

1. 529 College Savings Plan

Pros:

  • Tax-deferred growth and tax-free withdrawals, as long as funds are used for qualified education expenses.
  • No annual contribution limit; each state sets its own lifetime limit, ranging from $300,000 to $600,000.
  • Can be used for more than just college—up to $10,000 per year can go toward elementary, middle, and high school expenses, including public, religious, and private school tuition.

Cons:

  • Non-qualified withdrawals are subject to a 10% penalty, except in certain circumstances like death or disability.
  • May slightly affect financial aid eligibility, but the impact is generally minimal.

2. Coverdell Education Savings Accounts (ESAs)

Pros:

  • Grows tax-deferred at the federal level.
  • Withdrawals are tax-free if used for qualified education expenses.

Cons:

  • Income limitations for eligibility.
  • The maximum annual contribution is $2,000.

3. Custodial Accounts (UGMA or UTMA)

Pros:

  • Can be set up in any taxable brokerage account.
  • Offers more flexibility, as funds can be spent on expenses beyond education.
  • No contribution limit.

Cons:

  • Tax benefits are limited.
  • Gift tax may apply.
  • Can significantly impact financial aid eligibility.

Summary:

After thoroughly familiarizing myself with the various types of college savings accounts and understanding the advantages and drawbacks of each, I believe I’m leaning toward starting a 529 account for our child. One significant factor is the tax benefit—any investment earnings from a 529 plan are not subject to taxes until they are withdrawn. Additionally, since it’s unlikely that we’ll be able to fully fund a half-million-dollar college education in 18 years, we want to at least position him to qualify for some financial aid.

The key takeaway is that, while it may seem daunting to save such a large amount, aside from prioritizing your own retirement savings, it’s wise to begin saving for your child’s future now. Like any investment, the power of compounding requires time. Even modest contributions, such as $300 per month or less, can make a significant difference. Your future self—and your child—will be grateful.

Sources:

https://www.investopedia.com/types-college-savings-plans-7187399

https://www.schwabmoneywise.com/essentials/college-savings-accounts

https://www.collegesimply.com/college-cost

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