Saving even just a little bit for college can make a big impact.
Not sure where to start? Find an expert in your state here or read below to learn more about saving for college.
start with a plan
- Remember, the more you save, the less you’ll have to borrow. While it may be a sacrifice in the short-term it pays long-term dividends.
- Set a savings goal and calculate how your savings will fit into your regular budget.
- Start early, so your money can have more time to grow.
- If possible, set up automatic deposit or transfer of your savings. That way, you can be sure to build your savings every month and not worry about forgetting.
- If extra income comes in, or it you get a bonus, tax refund, inheritance, or other influx, put a percentage toward your college savings.
- Make it a family activity. Have your child contribute to their college savings with a percentage of their allowance or income from a part-time job. This will not only help grow the savings, but will teach valuable habits and help your child feel invested in their education.
invest in a tax-advantaged savings account
Consider investing in a 529 Plan. A 529 Plan is a tax-advantaged education savings plan sponsored by a state or state agency. Money saved through the plan can be used for college tuition, books, and other education-related expenses at most higher education institutions in the U.S.
- 529 plans are usually categorized as either college savings plans or prepaid tuition plans. College savings plans work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. Prepaid tuition plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.
The main advantage of a 529 Plan is that earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Contributions to a 529 plan, however, are not tax deductible.
- You can invest in most state plans if you are 18 or older.
- A 529 Plan also serves to help you keep a dedicated college savings account and track those savings and expenditures more easily.
Coverdell Savings Accounts
A Coverdell Education Savings Account is similar to a 529 Plan, in that it offers tax-free savings and tax-free withdrawals of funds spent on education expenses. In addition to college expenses, certain K-12 purchases are also considered qualified when using a Coverdell ESA.
- However, tax-free withdrawals from 529 Plans are limited to $10,000 in tuition expenses for K-12 schools, but when using a Coverdell ESAs, qualified elementary and secondary education expenses also include books, supplies, equipment, academic tutoring, and special needs services in connection with enrollment or attendance at an eligible school.
- Coverdell ESAs have much lower maximum contribution limits per child, and they are only available to families below a specified income level.
Private College 529 Plans
Private College 529 Plan is a prepaid tuition plan that allows families to buy tuition at today’s rates that can be used at any of the nearly 300 participating colleges and universities for up to 30 years. No matter how much tuition increases over the years, or how volatile financial markets are, the participating institutions guarantee your prepaid tuition. Account owners pay no fees. Every dollar you contribute goes toward the purchase of tuition.
- Private College 529 Plan offers the same federal tax benefits as any 529 prepaid tuition plan or state-sponsored 529 college savings plan. The value of your Private College 529 account grows as tuition increases. The increased value of your account is tax deferred and if the assets are used to pay qualified higher education expenses, the increase in value is tax free.