Never Too Soon
Smart Strategies for College Saving
Story by Jamey Bradbury
Even if your little one is still in diapers, the time to start planning for how you’ll pay for her college tuition is now. According to finaid.org, college tuition rates increase at roughly twice the general inflation rate; this means that, for your newborn, college will cost three times what it does today.
“When people calculate what the price of college might be, they often get paralyzed by the numbers,” admits Lael Oldmixon, director of the UA College Savings Plan. Oldmixon suggests using calculators like the ones at savingforcollege.com or collegesavings.org to get a realistic sense of tuition costs.
The good news? “Parents who are already thinking about putting money aside have taken a huge first step.”
Step Two: Save Now, Save Often
“We encourage parents to start saving for college when their children are born because the longer you have to save, the better,” advises Michelle Felix of Denali Alaskan Federal Credit Union. If you contribute money to an investment account now, it begins to compound; your money generates earnings, which are then reinvested to generate additional earnings. Essentially, your money makes more money. The longer that money has to grow, the more you’ll have on the day your child heads off to a college or university.
Many banks and credit unions have incentives to encourage parents to open savings accounts early – and to keep saving once they do. “A savings or investment account is a great vehicle,” says Tim Dombrowsky, Denali Alaskan FCU’s financial advisor, “but if you don’t put anything in it to help it grow, what’s the point? You have to make a plan for saving.”
Make It Automatic
But it’s not enough to plan on socking away whatever “extra” money you have leftover at the end of each month, warns Chrissy Bell of Credit Union 1. “Treat those savings like a monthly bill; budget for it up front. If it’s the last thing you think of, it’s going to get spent.” Consider signing up for payroll deductions or setting up an automatic transfer of funds to avoid “accidentally” spending what you ought to save. And when you do find yourself with a little extra, save it rather than spend it. For example, when your child starts kindergarten, put the money you once spent on daycare into her college fund. Also consider investing bonuses like tax refunds, work raises or your PFD.
The Alaskan Advantage
As Alaskans, we’re in a unique position to save by designating all or a portion of our PFDs to automatically go into a savings or investment account. Many banks even offer certificates of deposit with special rates at PFD time, so you can make the most of your Alaskan bonus, says Michelle Felix.
Did you know that we also live in a state that has one of the top-ranked college savings plans in the country? The UA College Savings Plan is a 529 plan that allows individuals to contribute funds into a tax-advantaged investment account managed by T. Rowe Price professionals. Bonnie Carroll, UA College Savings Plan marketing manager, explains: “The funds you put into the account are invested and can accrue earnings that aren’t taxed as the account grows. If the account is used for qualified higher education expenses, those earnings are tax-free. With a 529 plan, your money grows faster.”
One unique feature of the UA College Savings Plan: You can designate half of your and/or your child’s PFD to be directly invested into this savings plan – making it an easy way to save. Keep in mind that every dollar you save means one less dollar you’ll have to pay back with interest if you take out a student loan.
While the money you invest into a 529 plan can be used for any eligible institution, in or out of state, the UA College Savings Plan also offers special benefits for students who enroll at the University of Alaska. The ACT Portfolio, says Carroll, “guarantees your earnings will keep up with tuition inflation at UA; if it fails to do that, we pay the difference.”
The best time to look into a 529 plan for your child? “Today,” says Carroll: “If you start late in the game, you could actually end up losing money with a 529 because these are intended to be long-term investments.”
A Family Affair
Whether you open a traditional savings account, a 529 plan or another savings vehicle, you don’t have to do all the work by yourself. When Lael Oldmixon opened a UA savings plan for her son, she took the account contribution slips she received and sent them to relatives. “I included a note from my son that said, ‘Dear Grandma, when you want to get me a special gift, consider setting some money aside for my education, instead.’ It’s a great way to celebrate milestones, by getting your family to contribute to college savings.”
As your children get older, you can involve them in saving for their own education, too. Local institutions like Denali Alaskan FCU and Credit Union 1 offer classes for teens on how to manage their financial health and save for college. By allowing your kids to manage a small part of their portfolio, or encouraging them to save money by offering to match whatever they put into their savings, you can help your future college student learn the value of investing in education. It’s a lesson they’ll take with them to college, and beyond.