Starting College Savings When Your Children Are Older

It’s common sense if you know much at all about investing and personal finance. If you intend to save for your children’s college education, the best thing you can do is start early – as early as possible.

The reason is simple – it’s all about the power of compound interest. When you save money for the future, it earns a return, and if you’re choosing to reinvest those returns, it accelerates.

If you put away $100 at 7% interest, for example, it turns into $107 after a year, but after another year you have $114.49 – you earned $7.49 instead of $7 in that second year. After year three, you have $122.50 – in that third year you earned $8.01 instead of $7.49. It keeps going and going like that, growing year after year – during the eighteenth year, it earns $22.11 on its own, just sitting there.

If you put aside $100 at 7% annual return and do nothing else but wait 18 years, it’ll be worth $338 when you go to withdraw it.

But what happens if you can’t – or don’t – start saving for your child’s college education when they’re really young? What if you don’t start saving until age 10, giving them only eight years until college?

Well, if you put aside $100 at 7% annual return and do nothing else but wait 8 years, it’ll be worth just $171.80.

See the difference? Just waiting 10 years to put away that $100 costs your child $166.20 in investment income.

It’s obviously a great idea to start saving young if you’re going to save, but what do you do if that’s not an option?

What if you just realized that your kid is eight and hitting high notes on their standardized tests and bringing home stellar report cards and you’re realizing that college probably needs to be in this kid’s future and how are you going to pay for it?

What if your kid is 10 and you finally got a good job, a real good job, and you now have the breathing room to save for things like college for the first time?

What do you do if you don’t have the advantage of all of that compound interest time?

Here’s the game plan.

Save What You Can, Starting Now

Open up a 529 college savings plan for your child (here’s a great comparison of various plans) and start saving now rather than later. Do it today, seriously.

Just open up that account, set your child as the beneficiary, then set up that account to automatically withdraw a little from your checking account each month. Even $20 is fine – whatever you can afford. Just start now.

It doesn’t have to be a lot. It just needs to be whatever you can afford, and it needs to start as soon as possible.

Start Putting Some ‘Gifts’ Into That Account

When it comes time for gift giving, make sure that at least some of their gift is an additional contribution to that account.

You can do this in a fun way so that your children realize what they’re being given. For example, you can give them an enlarged photocopy of a $20 or a $50 or a $100 bill and write on it, “This was put into your college savings,” and then wrap that sheet up in a shirt box with some tissue paper. While it won’t be something they’re incredibly excited about right now, they will remember those gifts later on when they realize they have a student loan that’s thousands of dollars less, and they’ll continue to remember it when they’ve got much smaller student loan payments when they’re an adult.

You can also encourage other relatives to do the same thing. Let relatives know that you’ve opened up a college savings account for your child and give them the information needed for them to contribute. Invite them to do the same thing – they can physically give the child a photocopied $10 bill or whatever along with some modest gift they’ll enjoy right now.

Lean Into Other Funding Options

It’s important to remember that paying for college isn’t just a mix of what you’ve saved up and student loans. There are many other options that your child can utilize when they’re ready to go to school.

For instance, many schools offer grants and scholarships of various kinds to incoming students based on financial need and merit. If you’re in a situation where it is a real struggle to save, you may find that the school offers your child a grant that takes care of some of the cost of school. Don’t assume that everything will be in the form of loans.

At the same time, your child can apply for scholarships independently. Again, if you are in a need-based situation, which is a common reason for struggling with college savings, there are many scholarships for which your child might be eligible.

Your child might also want to divert some portion of any income they earn in high school to their own collegiate future. While they’re at home, you’re likely taking care of expenses such as food and shelter and functional clothing, so they should be able to channel some of their income to college savings.

Related: Roth IRA vs. 529 Plan: Which Is Best for College Savings?

Look at Other Education and Career Options

If you’re starting savings at a late date and if you can’t contribute large amounts, you should still save, but you should keep your eyes on other options besides a traditional four-year college experience, where the money you are able to save will have a bigger impact.

For starters, your child may want to explore attending a community college for a year or two where they take care of general education requirements and really hone in on what they want to do with their life before switching to a four-year school to finish their education. Credits at the community college level are inexpensive and they usually transfer directly to many four year colleges and universities. It’s a great way to cut the cost of college while still earning that four-year degree.

Your child may also want to consider trade school. Trade schools offer a path directly into a trade of some kind, which typically offers an avenue into a well-paying career path for your child without the expense of a four-year school. Many careers center around a trade school program, including electrical work, plumbing, construction management, airplane maintenance, machining, HVAC work, and many other fields.

Trade school generally takes far less time than a four-year university and usually places people directly into some kind of apprenticeship program where they learn the ins and outs of plying the trade professionally. The total cost of trade school is far less than a four-year school, too, and 529 savings can usually be applied to trade school tuition.

They may also have other opportunities directly after high school, particularly if they have a solid job and haven’t figured out quite what they want to do. If they choose to wait a year or two before beginning their education so that they’re certain of what they want to do (a “gap year”), this gives their college savings another year to grow.

Don’t fall into the mindset that the only acceptable path after high school is directly into a four-year school.

Be Supportive During College

Another method of reducing the need for savings during the college years is to encourage your child to attend a school near where you live and then provide the “room and board” portion of the college expense directly. Your child continues to live at home and you continue to provide food, clothing, and other basic needs. This way, the only expenses for college are tuition and educational materials.

Obviously, this isn’t a perfect solution for all families. It nudges students to choose a school that’s closer to home out of financial expedience rather than the absolute best choice for their educational future.

Basically, the more of the day-to-day expenses of living as an independent college student that you can take on as a parent for your child, the less student loans they’ll have to deal with and the less of a problem your late start to college savings will be.

Final Thoughts

The big thing to remember is this: It is never too late to start saving for college for your child. You can always start saving, even if the date is late, and every dollar counts.

Your help with college doesn’t begin and end with how much you’ve saved, either. There are many ways to make a big financial difference with their post high school educational and career choices.

Good luck!

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