If you’re one of the millions of parents receiving a tax refund this year, you may be weighing which child-related expense it should go towards: sports, school fees, new clothes for growing bodies? The list is never-ending. But here’s one you might want to put at the top of that list: funding a college savings plan.
According to Morgan Stanley, tax refunds in 2021 are expected to be up 26% over last year, and 65% of Americans are planning to put that money into a savings account. Factor in stimulus payments—which many people are receiving around the same time—and some parents are discovering there’s a little extra in their budget. Why not put it towards college?
“Tax refunds and credits are a found opportunity when it comes to saving for college. Sometimes carving out resources and funds from a monthly budget can be hard. This type of one-time infusion into a college savings account can go a long way,” says Tim Gorrell, executive director of the Ohio Tuition Trust Authority which manages Ohio’s 529 Plan, CollegeAdvantage.
Using Found Money to Fund a College Savings Plan
How far? I was curious, so I hopped on to the CollegeAdvantage website and used their handy College Savings Planner calculator. I factored in the annual average refund—which is around $2,800—plus the recent $3,000 stimulus child credit. If I did this every year until my middle schooler graduates, the calculator estimates I’d be able to pay for tuition plus room and board for the first two years at a public 4-year college. Not bad for “found money.”
Tarun Garg, head of college savings at BlackRock, explains it best: “The biggest benefit of a tax-advantaged account like a 529 is tax-free compounding of your money. The longer your money stays in the account, the more it grows and the more you save on taxes. And remember, you do not need to save 100% of the anticipated college expenses. Your child may also have access to financial aid.”
In fact, according to “How America Pays for College,” the national study from Sallie Mae and Ipsos, scholarships and grants covered 25% of college costs and were used by 73% of families in the 2019-2020 academic year.
Small Monthly Contributions to 529 Plan Add Up
While putting in a large amount each year might not be feasible, small monthly contributions might be. “A lot of people make the assumption that they can’t do this, but you only need $25 to set up an account, and parents can contribute as little as $25 per month” says Gorrell. I tried these numbers in the College Savings Planner, too. I started with the $3,000 stimulus payment from this year, then factored in $50 a month. After all, we’re not using as much gas money as we used to so we can use that money to fund our college savings plan. With these numbers for my current sixth grader, we’d be able to save a tidy sum by the time she graduates from high school.
“One major benefit of a fixed contribution each month is that it achieves something called “dollar cost averaging,” explains Garg. “When markets are down, you buy more shares and when markets are up, you buy fewer shares. The strategy delivers a smoother experience and is easier on your budget as well.”
After all, that’s what it comes down to for most parents: saving for college without breaking the bank.