Here’s exactly when the majority of families start saving for college — but experts say that’s simply not good enough

While that quote was from about 10 years ago, we recently ran across it while we were pondering a story about how soon you should start saving for your kids’ college. And it made us wonder: Should you pull a Swift one and start thinking about your kids’ college — or even saving for it — before your kids are born?  (Good news on the general savings front too, as we know all to well that having kids gets pricey even before college: Many high-interest savings accounts are now paying upwards of 4%; see the highest savings rates you may get now here.)

Generally speaking, the answer is yes, assuming you know you want to have children, pros say. “I’m a huge fan of this strategy because you’re able to maximize the attractiveness of a 529 plan by letting assets grow longer tax deferred. If you start an account when you have a newborn, you have 18 years for those assets to grow. If you start before a child is born, you can add many years onto that tax free compounding,” says certified financial planner Neela Hummel at Abacus Wealth Partners. 

Basically, a 529 plan is a tax-advantaged custodial investment account designed to help people save for future education costs. Pros generally advocate for these plans because of their high contribution limit, their tax-deferred growth, tax-free withdrawals and tax-deductible contributions. Some states also offer prepaid tuition plans for college whereby tuition can be locked in at current rates for someone who may not be attending college for years to come.

Mark Kantrowitz, student loan expert and author of “How to Appeal for More College Aid,” says if you start saving from birth, about a third of the college savings goal will come from the earnings. “If you wait until high school to start saving, less than 10% will come from the earnings and you will have to save six times as much to reach the same college savings goal. If you start saving before birth, you increase the time for the earnings to compound,” says Kantrowitz.

Certified financial planner Nicholas Covyeau at Swell Financial Partners says he has several colleagues and clients that have chosen this route, simply for the compound interest. “The rules state that the only thing you need to have to set up a valid 529 account is a Social Security number, and upon the birth of your child, you can re-register the account into their name without taxes or penalties,” says Covyeau. Because you need a social security number to open a 529 account, if you start saving before your child is born, you can name yourself as the owner and beneficiary and then transfer it to your child.

Starting early means that a lower contribution is necessary to fully fund the child’s education as the earlier you start, the more compounding will take place. Ultimately, Kantrowitz says, “It’s cheaper to save than to borrow. Every dollar you save is a dollar less you’ll have to borrow. Every dollar you borrow will cost about 2 dollars by the time you repay the debt, so you save money by saving money.”

When do families typically start saving for college?

A 2020 Sallie Mae and Ipsos report entitled “Higher Ambitions: How America Plans for Post-secondary Education,” found that just 48% of families with a high school kid had saved for the child’s future education. Their average savings was $26,266, and the majority of these families didn’t start saving until later in their child’s life. Indeed, while 44% started saving when the child was six or younger, 32% started from ages 7-12, and 16% when the child was a teenager.

From what she’s seen, certified financial planner Ann Garcia, author of “How to Pay for College,” says the average family starts saving for college when their child is about 7 years old. “This is unfortunate because not only have you lost out on years of potential savings, but the timeline to college is so short that you’ve foregone a lot of potential compound growth. A family that’s set aside $10,000 for college before a child is born would have somewhere around $35,000 when the child graduates from high school. If they waited until the child was 7, they’d need to save $200 per month every month through high school, a total of about $32,000 in contributions, to have that same amount available for college,” says Garcia.

What to ask yourself before saving for college

But before setting aside college funds for your unborn child, Covyeau recommends making sure your personal finances are in order. “Are all of your student loans, credit cards and car payments paid off? Is your emergency fund fully funded? Are you able to max out your IRA or Roth IRA? Can you max out your 401(k)? Is there still leftover money that you can apply toward your mortgage or a brokerage account? If the answer is yes, then it may make sense to open a 529 account if you see yourself having children in the future,” says Covyeau.

Something else to think about, for those with significant wealth, is deferring the use of 529 monies for grandchildren or great-grandchildren. “If you’re worth hundreds of millions of dollars when your children go to school, I would have you pay the tuition and other costs out of your current cash flow, preserving the 529 for future generations,” says certified financial planner Tom Zimmerman at Zimmerman Wealth Management. What’s more, these funds can also be used for nieces, nephews and other family members. 

What will happen to the college savings if I don’t end up having kids?

Worst case scenario, if you don’t end up having kids, you can either use the 529 funds to go back to school yourself or take the tax penalty hit on the earnings, not the principal, portion of your money. 

Does saving early have disadvantages?

While saving early is generally lauded by experts, it’s not without some disadvantages. Although he personally opened two 529 accounts before he was even married let alone had kids, certified financial planner Chris Jaccard at Financial Alternatives, says it’s not necessary to start quite that early. “It adds complexity to your portfolio because it’s another account and financial institution to deal with, the account could be potentially underfunded and forgotten about, or overfunded and not used and they can take away cash that is better invested in other opportunities.”