Next to buying a home, funding a child or grandchild’s college education may likely be your biggest expense—and the price is only getting higher. According to the College Board, the total cost of a four-year private college education today averages just under $190,0001; assuming costs rise by 3% a year, that number will swell to $323,000 by 2035, when a child born today enrolls as a freshman2.
When it comes to covering education expenses, one option is to borrow the money through the use of student loans. Another option is to utilize tax-advantaged investment accounts – like a 529 College Savings Plan. If you choose to go this route, the earlier you start investing, the better.
For one thing, small contributions, made regularly, can add up dramatically over time thanks to the power of compounding. What’s more, early in the savings cycle, you can benefit from the earnings potential of more aggressive investments, such as stocks, shifting to more conservative holdings—like bonds—as your beneficiary approaches college age.
And, of course, by not taking out a loan, you’ll avoid paying interest, which can easily double or triple your total outlay over time.
Of the various education savings vehicles available today, perhaps the best-known is a 529 College Savings Plan (529 Plan). Consider these advantages:
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It’s important to save for college in a way that maximizes your potential return and minimizes your tax liability. PNC can help you decide if a 529 Plan is appropriate for you—and a good fit with your other financial goals.
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Custodial Accounts: Another Way to Save
If you’re putting money aside for college, you may want to consider opening a custodial account—either instead of or together with a 529 Plan. It’s a bank or investment account that you manage for a minor under the Uniform Transfers to Minors Act.
As custodian, you have full control of the account and can make withdrawals of any size at any time to cover expenses for the child—not just college, but things like travel, summer camp, music lessons and clothes. There are no restrictions on how much you can put in or on who can contribute.
One caveat: All transfers into a custodial account are irrevocable—any money you put in belongs to the beneficiary, who assumes control at age 18 or 21 (differs by state) and can use the money as he or she chooses. Ideally, the beneficiary’s intentions will align with yours.
College Board: Trends in College Pricing (https://trends.collegeboard.org/college-pricing)
College Board: College Cost Calculator (https://bigfuture.collegeboard.org/pay-for-college/college-costs/college-costs-calculator)
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