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Saving for College Now

Feb 1

Saving for College Now
 

From Kindergarten to College

It’s your child’s first day of kindergarten. As you watch her walking into the classroom, shoes tied tight and lunchbox in hand, you realize that this is only the beginning of a long string of first days of school. First day of junior high. First day of high school. First day of college.

If that last one made you gulp, rest assured, you’re not alone. College is a huge milestone and it can also be a huge expense. And with the cost of tuition rising by about 8% every year, your little kindergartener will be looking at prices up to four times the cost of college right now.

It’s Not as Bad as it Seems

Saving that kind of money can be a scary prospect, but not an impossible one. The good news is the entire cost of your child’s college education isn’t completely on your shoulders. There are many factors to consider:

  • First, take heart in the fact that college students often receive enough government aid, school assistance, and scholarships to cover about a third of their total expenses.
  • Second, even though college costs continue to inflate, so does your income, which means the difference won’t actually be four times as expensive.
  • Third, every little bit helps when you start saving early. Even a small contribution set aside now will grow over the years and be a big help down the road.

But there’s still a matter of the other two thirds of your child’s college expenses that need to be paid for. Luckily, there are lots of great plans and investment strategies out there that can help you save now so you don’t have to pay back loans and interest later on.

Plan Ahead to Make Your Money Work for You

When you start thinking about trying to squeeze enough out of your current income to set aside money for college, remember this: you can save now or you can take out loans and pay later, but either way you’re going to be paying for that college education. By paying now, your money can earn interest and further offset the cost. If you have to pay back loans, not only will you lose that earned interest, you’ll be paying interest on the loans.

Clearly, if you can make it work, saving now is the way to go. And there lots of great ways to help you save and make the most of each dollar you put away.

  • You can set up a 529 savings plan for your child at age. This investment account helps you set aside money and earn interest tax-free. And as long as you withdraw the money for college, you won’t pay taxes on it at all. Many parents encourage friends or family members to contribute toward the plan in lieu of gifts for their child. These plans are offered by every state and can vary, so be sure to research which plan is right for you.
  • With a prepaid tuition plan, you can actually pay for your child’s future college tuition at today’s rates. Like the 529 plans, these plans are set up with individual states, so make sure you know all the rules before you begin. For example, some require that the plan be used only for that state’s colleges.
  • The options don’t stop there. There’s also traditional IRA and Roth IRA accounts, Coverdell education savings accounts, and custodial accounts. Each offers different tax breaks that can help you save a significant portion of your investment. Just remember that a large amount of money in your child’s name may decrease her financial aid package, so be sure to visit the IRS website or consult a financial advisor to learn about which options may be best for you.

In addition to all these options, stocks and mutual funds are a great way to build savings fast enough to keep up with the rising cost of tuition. While stocks are riskier than a savings plan, you can switch your money over to cash as your child gets closer to attending college. Consult a professional to get started and remember that you’re not just investing your money, you’re investing in your child’s future.

For more information on your state’s 529 savings plans, visit www.savingforcollege.com/529_plan_details/

For more information on IRAs, visit www.irs.gov/publications/p590/