Best Practices for Starting and Growing a College Fund

American parents are often worried by the rising costs of college tuition. They do not want their children to have to deal with the student loan crisis that currently afflicts millions of Americans. A college fund is an important way for these parents to save up money and help their children after high school graduation. Residents of all US states can access tax-deferred plans that will allow them to grow their money tax-free as long as they eventually use this money for their children’s education. Parents who want to make the most of these plans must have a well-thought-out approach and detailed plan in order to be successful.

The first step for any college fund is to decide on the parents’ goals relative to their finances. Parents need only place a small percentage of their overall income into these programs. They also need to start saving early on, and choose low-cost plans or asset classes that may fluctuate but actually gain in value over the long term. Having a well-defined financial goal can help parents plan contributions and allocations accordingly.

Next, the college fund investor has to pick his or her investment strategy. There are two overarching strategies for investment. Passive investing is an approach in which an individual buys an index fund of assets and holds on to those assets for an extended period of time. This approach to investing has minuscule fees, and depends on the overall fluctuations of the stock or bond market.

The other popular approach to investing is active management. With active management, individuals pay managers to invest in stocks and bonds for them. Such investments are helpful for realizing eventual investment goals without having to endure the ups and downs of stocks and bonds. However, actively managed funds cost more to invest in. It is up to parents whether or not they want to pay extra for this management of their long-term college savings plan.

Not all parents will be able to use a savings plan to completely fund an entire college education. Tuition continues to rise and students might take longer than four years to graduate. Still, payments from a college savings plan can sometimes significantly reduce the size of a student loan. As long as parents are diligent and invest properly, they can make a profound difference in the lives of their children.