I grew up in a blue-collar environment with parents who had a strong work ethic but little financial literacy. Retirement was a foreign concept to them—they planned to work until the day they died. But, like all parents, they wanted me to have a better life. So for as long as I can remember, I knew I was going to college.
It wasn’t easy. We didn’t understand how to navigate the process of obtaining a higher education; the applications, scholarships, loans, etc., were overwhelming. But my parents knew it was critical that I did well in school. We spent family time going over homework to ensure I was getting the most from my education. And through a combination of academic scholarships, student loans, and part-time jobs, I was able to afford my undergraduate degree. But it was stressful.
Similar responsibility, less stress
I’m a parent now with 2 small children of my own. College is an expectation for both of them, much as it was for my brother and me. My husband and I are thoughtful about teaching our children the importance of education and leveraging that knowledge to become positive community stewards.
We want our kids to feel responsible for their education, but I don’t want them to feel the stress I felt in having to fully fund it. Our hope is that they understand their primary contribution is to learn and that we can relieve some of the pressure of paying for their education. (It’s every parent’s goal for their kids to have a better life than they did, right?) So we’re saving for college.
3 ways to stay focused on your goal
529 plans can be a great choice for saving for a loved one’s education. They provide tax-deferred growth and tax-free withdrawals, as long as you use the money for qualified education expenses.* Most states also let you deduct your 529 plan contributions on your state income tax return, up to your state’s limit.**
If you’re already investing in a 529 plan, keep it up! And if you haven’t started, it’s not too late—the second-best time to start investing is right now. Through Vanguard research and conversations with parents, we found that successful college savers have these 3 habits in common:
- Start early. This tried-and-true investing advice is especially important when saving for college. You may have 40 years to save for retirement but less than half that amount of time to prepare for college expenses. (And ask any parent: Time flies by!) But if you haven’t started yet, it’s okay. Our best advice is to dive right in and start contributing whatever amount you can. We know that saving for college can feel overwhelming, but every dollar you save is a dollar (plus potential growth!) that your child (or grandchild) won’t have to borrow later.
- Keep saving. We recently published a research paper that shows 529 plan contribution rates tend to decline as the beneficiary gets older. The research indicates that when the beneficiary reached age 17, the average college savings account balance was less than the average of what families paid for a single year of college in 2017–2018.† Stopping or decreasing your contributions could cause you to fall short of your goal. One way to maintain the savings momentum is to invest automatically. Even small contributions, made consistently over multiple years, can add up to impressive totals over the long term.
- Keep an eye on your investments. You’ll want to ensure you have the best chance for investment success based on your risk tolerance and time frame. Generally speaking, the younger the child is, the more of the portfolio you’d want to consider investing in stocks. As the child approaches college, consider investing in more conservative options like bonds and cash. Most 529 plans offer individual portfolios and age-based options. Individual portfolios are for DIY investors who understand diversification and like to manage their money. But if you don’t want to make those types of decisions, consider age-based options. These investments automatically move to shorter-term, more conservative investments as the child gets older.
How do you approach saving for college?
We know saving for college can seem daunting. But I hope these tips can help you create a plan to help you get to your goal. If you’d like to learn more, we have some great college savings tools and information on our website.
I’d also love to hear your thoughts below on what worked well when you saved for a loved one’s education or any lessons you’ve learned along the way.
*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.
**The availability of tax or other benefits may be contingent on meeting other requirements.
†Sallie Mae/Ipsos, How America Pays for College 2018.
For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as distributor for some 529 plans.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Investments in bonds are subject to interest rate, credit, and inflation risk.