If you have children under the age of twelve, you already know that very few of them have saving for college anywhere on the radar. It probably doesn't crack the top one-hundred in their priority list, and may even rank below cleaning their room. However, as parents, we know how important it is to save for college. How can we motivate our kids to save for higher education?
First, a very important note: If you waited until your children are tweens to start saving for college, you have waited too long. Go straight to Step 3, and even then, you will need to hustle to limit the future student loan burdens on your child.
Since you should start saving for your child's college before they have any concept of college, it is best to teach them the value of money and overall savings in their early years, and then direct the focus toward college over time.
Here are three ways to lay the groundwork for a successful college savings plan:
Step 1: Set a Proper Example – Kids act on what you do, not what you say. If they see Mom and Dad value money, they will learn to value it, too. Keep a budget and live within your means. Involve your kids in grocery shopping so they can understand costs and budgets. Letting them choose the "treat of the week", or something similar, empowers them while teaching them how to stay within limits. Help them understand the difference between wants and needs.
Step 2: Set Savings Goals and Keep Track – Give them an allowance at an early age – ideally in exchange for helping with family chores – so they can begin learning money management. Help your children set a small purchase target – a toy, perhaps – and show them how to set aside a certain amount per month toward that goal. A visual goal like a fundraising thermometer can be powerful, especially as it nears completion. Encourage this approach as they get older and it will roll easily into a college savings approach.
Be realistic but creative. If their goal is ambitious but worthy, offer to contribute a certain amount for every part they contribute. They may become frustrated and give up if their goal is unrealistic.
Step 3: Start a 529 Savings Plan – This arguably should be Step 1. While authorized by Section 529 of the Internal Revenue Code, 529 plans are investment plans operated by a state or educational institution. These plans allow you (or anyone) to contribute to your child's education and build up a tax-free pool of funds for educational purposes only. This makes it perfect as a vehicle for kids to partially contribute to their own college fund, as it's investment-based and provides greater returns than a savings account. Start the plan early, and then as your kids enter the tween years, show them how to contribute to it.
There are other college investment vehicles, but 529s have many advantages. Accounts can be opened in some states with less than $100, there are no income or age limits, and you can roll it over to a different family member if plans change. There are many other advantages, so check your state's program as well as other states of interest – you do not have to be a resident to join, but check for fees and limitations.
If you have followed these steps, your child is likely to gain an appreciation for savings in general and saving for college in particular. As they grow older, and they consider career paths, saving for college may even crack their top ten priorities. However, don't expect the room cleaning priority to change!
If you have an older child who already has student debt, find out quickly at what rate you can refinance their student loan.