by Matt Frankel, CFP | Updated July 17, 2021 - First published on Feb. 8, 2019
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The short answer is "as soon as possible," but there's a lot more to the story.Image source: Getty Images.
If you're a parent, or are going to be a parent soon, there's a good chance you've thought about the high cost of college. After all, the average cost of in-state tuition and fees is currently about $10,000 per year, and that's in addition to room, board, books, and other expenses. So you can only imagine how expensive it will be when your kids reach college age. With that in mind, here's a rundown of when you can start a college fund for your child, the best ways to start saving, and why it's important to get started early.
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You can start saving for college expenses at any time, but in order to do it in a 529 plan or Coverdell ESA (more on those in a bit), there are a couple of things to know.
First, these accounts need to have a beneficiary for whom the account will be used. In order for your child to be named as the account's beneficiary, you'll need their Social Security number. Based on personal experience -- I've been through the college account set-up process twice for my own children -- you can expect to have it about two weeks after your child is born. Once you have it, you are able to set up a college savings account in your child's name.
Having said that, there's a way to get started even sooner -- before your child is born. With 529 plans and Coverdell ESAs, you can change the beneficiary quite easily. So it's possible to set up an account with yourself listed as the beneficiary, and then change it after your child is born.
I don't see any reason to do it that early, but it's possible. I started 529 plans for both of my children when they were just a few months old. And if you receive cash as a baby gift from anyone, it can make an excellent opening deposit.
There are several different ways you can save for college. For example, many parents simply choose to set aside money in a regular bank savings account, or even a checking account. Others use their own brokerage account to invest for college, and plan to sell investments and withdraw funds when the time comes.
Having said that, there are some advantages to using college-specific and other tax-advantaged savings vehicles. Here's a quick rundown of the three main options in this category:
The short answer is that you should get started as soon as possible. I'm not saying that you need to start a 529 plan for your yet-to-be-born children, but the longer you allow for your money to compound (and to ride out the market's ups and downs), the better.
As a final thought, consider this simplified example. Let's say that you want to have $25,000 available to help put your child through college once they turn 18, and that you can expect an average annualized return of 7% on your investments.
If you wait until your child is 10 years old to start saving, you'll need to set aside about $2,100 per year, or about $175 per month in order to meet your goal. If you start saving when your child is five years old, the annual funding requirement drops to just $1,109, or about $92 per month. And finally, if you start when your child is born, you'll only need to set aside $669 each year, or $56 per month in order to meet your $25,000 goal.
The bottom line is that the sooner you start saving for college, the easier it will be to reach your goal. So, if you're able to start saving now, it may be a smart idea to not put it off any longer.
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