It seems like 18 years would be more than enough time to plan for a child's future education.
But from the cost of diapers in the early years to the cost of a car when your kid turns 16, it can be daunting to add saving for college to the list of parental expenses. For some, it might feel impossible.
According to the latest report by banking company Sallie Mae, 56 percent of parents are actively saving for the child's education. Those parents have saved an average of around $18,000, which is less than one year of tuition, fees, room and board at the average in-state public university, according to College Board.
With the cost of college rising each year, Financial Adviser Brian Ramsay, with WealthSpan Partners in Davenport, said it's important for parents to kick-start saving for college as early as possible.
Here are some questions he asks parents to consider when planning for their child's education.
How much do you want to cover?
Ramsay said the first step is to determine, as a parent, how much of your child's college costs you want to cover.
"That's the first place you have to start," he said. "All parents have different beliefs. Some want to pay for the entire cost and some want the child to have skin in the game and pay for a third or half of it."
How much will it cost?
Next, Ramsay advises using research and online tools to determine how much your child's education will cost.
Tuition varies depending on what type of institution your child will attend, whether it's public or private and whether it's in or outside of your state of residence.
College Board's website allows you to search for colleges, look up tuition and admission rates, plus learn how much each school typically gives in financial aid and scholarships.
The website also features a college cost calculator, where you can plug in the cost of tuition today, an inflation rate (recommended at 5 percent) and how many years until your child will attend college.
The average student doesn't usually pay the full cost for college, but the calculator gives an idea of how much you should save before your kid leaves the nest. From there, you can determine how much you need to save each month to reach the final goal.
How do you want to save?
Here comes the more complicated part. Ramsay said the next step is figuring out what method you want to use to save for your child's education.
But there are plenty of options.
First, you can consider a taxable investment, which could be in the form of mutual funds or individual stocks. The benefit of taxable savings, Ramsay said, is the parent has control over how the money gets used. The downside is earnings are subject to annual income taxes, plus any capital gains tax that may be applied when investments are sold.
Another option for saving is to use a UGMA or UTMA custodial account. These accounts are irrevocable gifts to your child, which must be used in their best interest. One caveat is that once your child reaches adult age, they can spend the money however they want. Your kid's not required to spend it on education. You can also invest in mutual funds or individual stocks using these accounts.
Under UTMA accounts, capital gains are also taxed when shares are sold, but they are reported on the child’s tax return, which Ramsay views as a positive. Custodial accounts are counted as a student asset on the FAFSA though, so they can reduce a student's financial aid award.
Lastly, perhaps the most common tool for college savings is using a 529 account. 529 plans are administered through each state. And they can only be used for education expenses.
Ramsay said one positive is savings in the 529 account grow tax-free, as long as the funds are used for higher education, and in some cases private k-12 costs. You can also receive a state income tax deduction for your contribution, depending on the state you live in.
But with the 529, investment strategies are limited to what's offered through the program. So you can't pick and choose any mutual funds or stocks you want. In Iowa’s 529 Plan, College Savings Iowa, you can choose pre-selected individual portfolios or an age-based track for investing.
One downside of the 529, Ramsay said, is if your child decides to not attend college or tuition is covered through scholarships, the money goes back to the parents. The parents will then have to pay taxes on it. Another option is passing on what is saved in the 529 to a qualifying family member, such as a sibling, without losing the tax-free status.
Another benefit of the 529 plan is that anyone can contribute to it, so grandparents or others can choose to add to the account. And a 529 plan is not considered an asset of the child, so it won't hurt your kid's chances of receiving financial aid.
What works best for you?
Ramsay said it's important to compare each savings option to decide the best path moving forward.
He said parents shouldn’t rely on one strategy. For example, don't use only a 529 plan requiring the money be spent on education, in case your child doesn't go to college or doesn't need the tuition help.
Instead, Ramsay advises using a combination of savings tactics.
"It certainly would be good to use a combination of vehicles for saving," he said. "The key takeaway is don't put everything in a 529 plan or don't put everything in a UTMA. Try to balance it. Maybe consider saving one-third in a 529, one-third in a UTMA and one-third in a taxable investment."