College may be the last thing on your mind as your child begins elementary school, but there are important steps you can take to prepare a young child for college.
Right now, your main focus should still be saving for college. With at least 8 more years to save, you have time to grow your college savings in a 529 plan. Investments in a 529 plan grow tax-deferred and distributions are tax-free when the money is used to pay for college expenses.
The elementary school years are also a good time to start talking about the importance of college with your child. It’s too early to select a college or decide on a major, but you can begin to establish an ongoing conversation about college affordability that will continue throughout high school. Setting an expectation that your child will go to college increases the likelihood that they will enroll in and graduate from college.
Here are some ways to prepare your child for college while they are in first through fifth grade.
Redirect day care costs to a 529 plan
Working parents in the U.S. spend close to $10,000 per year, on average, for full-time day care. When your child begins elementary school, consider redirecting the money you would have spent on day care to their 529 plan. You may still have to pay for after-school and summer childcare until your child is old enough to be home alone but redirecting even a portion of the full-time day care costs can help you save more for college.
Most 529 plans offer automatic investment plans that allow you to schedule automatic transfers from a linked bank account on a regular basis. By increasing your automatic contributions by the amount of previous day care costs, you can grow your child’s college savings without having the opportunity to spend the money on something else first.
Benchmark your 529 plan savings
With only about 10 or so years left until college, it’s time to re-evaluate your college savings strategy. Use a college savings calculator to determine how much to save in a 529 plan each month based on your child’s age and the type of college they want to attend. Aim to save about one-third of the total projected future college costs, assuming you can cover the remaining two-thirds with current income and student loans.
Consider increasing your 529 plan contributions if your household income has changed or you had another child. If you have more than one child, you may want to consider opening a 529 plan for each sibling. This will allow you to customize the 529 plan investments based on each child’s age.
To check to see if your savings are on track to meet your goal, multiply your child’s age by $3,000 for an in-state public 4-year college, $5,000 for an out-of-state public 4-year college and $7,000 for a private non-profit 4-year college.
Adjust 529 plan investment allocations
If you’re coming up short of your college savings goal and you are unable to increase monthly contributions to compensate, you might consider investing more aggressively to boost returns. Increasing equity allocation in a 529 plan from 80% to 100% yields greater returns without adding significant investment risk.
If you invest in an age-based investment portfolio, your equity allocations will automatically shift toward more conservative options over time. To increase equity exposure, you can switch to an age-based portfolio with a more aggressive mix of investments. You may make two 529 plan investment changes per year.
Begin the college money talk
Your child’s elementary school years are the perfect time to begin teaching them about the value of a college education. It’s recommended that parents talk to their children about paying for college before they are 15 years old. But, there are benefits to starting the discussion earlier. Having an early college money talk with your child may encourage them to work hard in school and get develop good study habits.
Start looking for scholarships
There is no need to wait until high school to start looking for scholarships. Scholarship opportunities for students start as early as kindergarten. When a scholarship recipient is a young child, the award is typically held in escrow until the student begins college, or the scholarship funds are contributed to a 529 plan.