Whether your children are newborns, preschoolers or in school, it is time to start thinking about college. From personal experience, I know that the sooner you start saving for college, the easier it is to carve out of your budget.
Based on advice from the experts, here is what you need to know about saving for college.
Affording the Right College Education
One of the first components of your college savings plan is to define your goal.
Not all college educations are the same, and you will want to consider early how you will define success.
College Costs. Your student will have a number of costs associated with their college years. These include:
- Room and Board
- Books and supplies
- A computer
- Miscellaneous expenses
These costs can vary greatly depending on the type of college or university your child will attend, so making a decision about their educational destination is important. Your local community college will have lower costs all around than an Ivy League institution or a private or public university away from home.
Based on information from recent College Board surveys, students enrolling this year can expect the following tuition and fees annually:
- Private College: $32,405
- State College/University: $9,410
- Community College: $3,435
Of course, these costs do not include room, board and other similar costs.
College Funding Sources. There are a number of ways that college students fund their education.
- Parents’ Savings
- Student’s Savings
- Grants and Scholarships
- Student Loans
- Student Employment
In most cases, many of these factors come into play. But early on, parents should have a strategy for paying for college. Clearly, if at all possible, student loans should be avoided. These saddle your children with college loan payments long into their careers.
And some careers make paying back student loans harder than other careers.
Experts recommend that parents first look at what percentages of costs might be borne through each of these resources. For example, you may want your student’s savings from their pre-college years to pay 5% of the cost. Perhaps you will want your student to be employed part-time during their college years, paying perhaps another 5% of the cost. Each family’s views on these sources will be individualized, so consider it carefully.
Calculating College Costs and Savings Needs. Once you have estimated the annual amount in today’s dollars that you will need for your student’s education, visit the College Board’s College Savings Calculator to see how much you will need to save each month to be ready when your child hits his or her freshman year in college.
State Sponsored Savings Plans. Federal law has created what are known as 529 Plans. These plans are sponsored by states and allow you to save for (and in some cases prepay) college tuition at one or more state-sponsored public colleges or universities.
The major advantages of 529 plans are:
- Income grows tax deferred. You will not pay federal or state taxes on the amount you set aside each month in these plans.
- Distributions are not taxed federally. When you draw funds out of these plans, the money you draw out is not subject to federal income tax.
- The owner of the account stays in control. Your student cannot just draw out funds for some other purpose; the parent (or grandparent or other person who owns the account) makes the decisions about how and when it is used.
- Plan assets are professionally managed. Rather than putting your college funds into a certificate of deposit or the stock market, the 529 plan is managed by professional investment managers.
- Savings is comparatively painless. Once you enroll and authorize automatic deductions,the deposits come out automatically in the way your specify. You can kick back, relax and watch the fund build.
Each state’s 529 plan is a little different. Find information about your state’s 529 plan at the Saving For College site.
Coverdell Education Savings Account. These accounts are available through a variety of financial institutions. The main features of an ESA are:
- Up to $2000 per year can be set aside; the contributions are not tax deductible, but the interest earned is
- Contributions can be made until the student beneficiary reaches 18
- Funds can be used for college, but they can also be used for eligible expenses for primary and secondary school years as well
- ESA plans are good, but are not enough all by themselves for most college savings plans.
Roth IRA. The Roth IRA is mainly a retirement savings account, but proceeds can be used for educational expenses for the IRA owner, spouse or children. Contributions tothe Roth IRA, like the ESA, are not tax deductible, but all interest earned is tax free. You can contribute up to $4,000 per year into a Roth IRA. Again, you will want to use Roth in conjunction with other plans.
Regular Savings. Many parents set up a regular savings account at their bank or credit union for college savings. This is a very flexible approach as there are no limits on how the funds are used. But with that flexibility comes the lack of any tax advantages.
Painless Savings. There are a number of programs offered currently that allow you to get credits for purchases you make on your credit card or in other ways that accumulate college savings. The most popular of these programs include:
- BabyMint. When you join BabyMint, you receive rebates from BabyMint affiliated retailers and rebates on the use of their MBNA BabyMint credit card.
- UPromise Like BabyMint, when you sign up for UPromise and use your credit card at selected retailers, rebates can be applied to a 529 college savings plan.
The most important part of saving for college is setting your goal and planning to achieve it. By taking a realistic look at your college expense needs and identifying a balance between funding and savings resources, you can be prepared for the time when your child enters college and begins his or her preparations for a rewarding education and career.