Right after you plop on the little hat and wrap him or her in the blanket like a burrito! Right. I’m sure there are people who begin planning at birth. Those people are called grandparents. I even heard of one single person who started a 529 plan for her future children, which were still just the proverbial gleam in her eye (not such a bad idea as the 529 fund could be used for her own further education).
Bottom line, earlier is better but it’s never too late. As we all know, the longer that funds are invested, the more time they have to grow. The longer the time horizon, the more potential there is to invest in stocks and other equities, which historically have a better return (but only over long periods). A few thousand dollars invested during a child’s early years can grow to a pretty impressive sum by college. For example, only $2,000 invested once and held for 18 years, 8% return, could grow to nearly $8,000 by the time the child goes to college. Now, $8,000 isn’t going to pay tuition at Stanford, but my guess is you wouldn’t turn it down, either. Same interest, same payment, but do it every year for 18 years and you’d potentially have nearly $75,000. At today’s prices, that’s a pretty nice sum to have socked away.
Really, if you think your child might be headed to an elite private school (and who doesn’t look at their infant and think he or she is a genius?), you’ll probably need more than $2,000 per year. But, some people get so intimidated by the vast price tags currently hanging off of diplomas that they never start at all. Saving something, even a little, but starting early and doing it consistently is almost always the best policy, whether for college, retirement, or any future goal. One caveat: pay attention to fees. There are plenty of “college planners” who work on commission and will sell you all kinds of wonder-investments for a heavy commission. It’ll be wrapped into the investment so you’ll never know what hit you. Even in 529 plans, some plans charge WAAYYYY more fees than others, and this can really eat your returns.
Okay, you haven’t done it and now your kid is in high school. It’s true you don’t have all that much time to save, but it’s still worth a run. You’re probably making more now than you were when Junior was an infant, and you have a better idea of whether you might qualify for financial aid. Now’s the time to take a look at how your investments and assets are distributed, and whether there’s the potential to shift some of them to qualify you for aid (if eligible or borderline) or explore tax strategies to produce a “tax scholarship” if it’s clear you won’t be eligible. Also, Roth and traditional IRAs (for you or the child) might be considered as another potential source of investing for college. Don’t forget Roths need to be invested for 5 years before tax free withdrawals on the gains, and might be reserved for later years of college or grad school.
Try not to wait until junior year—that’s the “look-back” year and you’re going to have to scramble if you want to use asset-moving or tax strategies. Whatever your picture is when you file the FAFSA (the day of) is what will be assessed for financial aid. It’s not too late for some strategies, but you’re going to need to get a move on.
If you’re the ultimate procrastinator and have waited until AFTER the financial aid awards were announced ‘round about May, well, there’s always next year. Next year, with a better plan. Maybe it’s time to call your friendly financial planner? I look forward to working with you…