You’ve probably heard the argument that people who go to college earn more than people who don’t, but you may be scratching your head wondering if college is still worth it such a high price—especially when the recent crisis has made saving even harder.
The economy might be in the can, but college is still expensive. Like, rob me in the middle of the night, repossess all of my assets expensive. The average price of a degree is projected to reach a staggering $205,000 in 2030 according to the U.S. Department of Education.
But it turns out that starting to build a college fund for your kids now, however small the contribution, could be the best decision you ever make...but not for the reason you think.
The Power of Investing in Expectations
Research shows that when parents open a college savings account for their kids, those kids perform better not just in school but throughout their lives. This isn’t just because these accounts make it easier to save money - it’s because they affect the way both parents and children form expectations.
When you start saving, going to college suddenly becomes something attainable for your child, maybe even an anticipated event rather than an aimless dream that fades with time. This makes both you and your kids more future oriented. Once you start saving you’re likely to save even more and they’re more likely to put in extra effort at school and work towards getting better grades.
Remarkably, this same research also suggests that the positive changes in parental attitudes that come from saving for their kid’s education may improve parents’ mental health, child development and parent–child interaction. Not bad for opening a savings account and making a regular monthly deposit.
When 529s are MIA
The most common way to save for college is with a 529 plan, which allows parents to contribute up to $15,000 per 529 plan per child and benefit from tax-deferred growth and tax-free withdrawals when savings are used for education expenses.
However, there are some problems with 529s that aren’t widely advertised by the banks offering them.
First, the money you add to a 529 can be invested, but your options for investment will be constrained by the bank you’ve got the account with, giving you less control over the assets.
Second, the account fees are sometimes so high that they might wipe out a chunk of the gains you’ve actually made. On top of this you get a 10% penalty for withdrawing cash for non-qualified expenses. So if your child has a medical problem and you need to withdraw some of the cash to pay for healthcare - that’s 10% you now owe the bank because the money wasn’t spent on tuition or textbooks.
Finally if you’re a little late to the party and your child will be applying to college in a few years, then you’ll have to make larger contributions faster. The problem here is that you’re more at risk if market movements lead to losses in the last few years before your kid goes to college.
College Investing that Doesn’t Suck
Fortunately there are new ways to save for your kids’ education that don’t involve reading all the fine print to make sure you’re not getting a raw deal. Most tools do this in two ways:
The first is by rounding up your spare change - lots of finance and investing apps now give you the ability to automatically save any left over pennies so when you buy a coffee for $3.50, the $0.50 change goes straight into a savings account. This is a great option, especially right now when the economy is slow and you may not be able to save that much in the first place.
The second way is to schedule an amount of money to come out of your account every week or month, allowing you to automate your savings. Again, most new finance and investing apps have this feature available.
Let’s say you set a rule that puts away $20/week and forget about it. If you don’t look at your balance and come back in a year, you’ll have saved $1040. This set and forget feature can help you build up funds which will compound overtime to orient both your and your kids expectations towards the future and give them the option of college if it makes sense. Just don’t forget to tell them!
Saving is never the most exciting thing on anyone's to-do list. But understanding how saving (and what you save for) impacts your children's expectations and ambitions can give the act of saving tangible meaning. Thanks to automation and spare change round-ups, saving in the background is simpler than ever. This way you can focus less on putting away the pennies and spend more time planning for the big things to come.
Disclaimer: this article should not be construed as containing investment advice.