When we first adopted our 2-year-old son, saving for college was the last thing on our minds. We were focused on helping him adjust, finding childcare, and balancing the needs of our new family with our two careers.
A year later, though, we set up a 529 savings plan and began channeling a small portion of our paychecks each month toward our preschooler鈥檚 college education. Money was tight, so the contributions were small. A few years later, when our son started kindergarten and we no longer had to pay for preschool, we were able to increase our contributions without even noticing.
Check out The ultimate guide to college and career readiness. College and career readiness is a fundamental part of every child鈥檚 K-12 education. Our guide provides practical insights to help you support your child鈥檚 path through high school and toward a successful college experience and a rewarding career.
Though we can’t be certain how much college will cost when today’s preschoolers are ready for college, we can use current figures as a guide. In 2014-2015, the (i.e. tuition, fees, room and board) was $18,632 at four-year public institutions and $37,990 at four-year private institutions, according to the U.S. Department of Education. And in the 10 years from 2005 to 2015, college costs rose about 25 percent.
Now that our son is a 15-year-old high school sophomore, college is a frequent topic of conversation around our house. Have we saved everything we need? No. But with continued saving and planning, we鈥檙e confident he鈥檒l be able to attend a college he loves, and, equally important, one that we can afford.
Here are some concrete steps you can take — starting now — to be better prepared to pay for college in the future.
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Open a college savings account.
Whatever you can save now, even if it feels like nothing, will help. You can start saving your change in a jar, open an interest-earning savings account at a bank, or you can put your savings inside a tax-advantaged college savings plan, which allows you to invest and (hopefully) grow your account, and then not pay federal taxes on the earnings, so long as you use the money to pay for qualified education expenses. (See below to learn more about the three tax-advantaged college savings plans.)
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Create a savings goal and make monthly contributions.
You can use an online to play with the numbers and come up with a realistic savings goal. 鈥淐hances are you鈥檒l be appalled by how big the number is, but it shouldn鈥檛 dissuade you from saving,鈥� says financial expert , author of Make Your Kid a Money Genius (Even If You鈥檙e Not) and Get a Financial Life.
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Save as much as you comfortably can.
Financial planner Mitch O鈥橦are of Colorado recommends . If you get an 8 percent return on your investment, he notes, you could save about $150,000 in that period thanks to compounding interest. But if that is out of your reach, don鈥檛 feel bad. Many students will get financial aid, and there is plenty of time to increase your contributions in the future. Even if you only contribute $25 a month, you鈥檒l likely have around $8,000 saved by the time your child is 18.
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Set up automatic deposits every payday or every month.
Research shows that setting up an automatic transfer from your paycheck to your savings plan is a than attempting to do it on your own. If your employer doesn鈥檛 offer an automatic payroll deduction for 529 plans, consider setting up a monthly transfer between your checking account and your savings account.
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Put the account in your name, not your child鈥檚.
In her book, Kobliner suggests this because when you apply for financial aid, the federal formula expects students to contribute 20 percent of their savings to college, while parents are only expected to contribute 5.6 percent.
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Get grandparents on board.
If your child is fortunate enough to have grandparents with savings and a desire to contribute, suggest they contribute to your 529 plan. Some 529 plans even provide gift-certificate forms that you can send to family members to encourage them to make contributions to your child鈥檚 plan. Grandparents can even set up their own 529 for your kids, but Kobliner doesn鈥檛 recommend it. The advantage of a separate grandparent 529 plan is that those assets don鈥檛 count toward financial aid calculations until they are used. But once they’re used, they can affect financial aid awards negatively because the , and students are expected to contribute 50 percent of their income toward college. If those same funds were in a 529 plan in your name, the federal formula would only expect the college contribution to be 5.6 percent.
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Don鈥檛 sacrifice your retirement savings for college savings.
鈥淢ax out of your 401(k) if you have one at work 鈥� especially if your employer offers a match — before you start contributing to a 529 plan,鈥� Kobliner advises. Prioritize , she adds, because you can borrow for college, but you can’t borrow for retirement. Keep contributing to an IRA as well, she says, because when you apply for federal student aid — grants and loans — down the road, money in your IRA won鈥檛 count against you.
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Check out supplementary accounts.
One way to save a bit more is through . This program will deposit a small percentage of your expenditures at hundreds of retailers into a college account for your child. You can invite family members to register their credit cards with Upromise to earn even more rewards. 鈥淭hese types of programs won鈥檛 end up funding your college,鈥� says Kobliner, 鈥渂ut as long as they aren鈥檛 charging big fees, they can鈥檛 hurt.鈥�
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Don鈥檛 fret about over saving.
You don鈥檛 have to use all the money in a 529 for one child. You can apply any excess funds to a second child鈥檚 education — or even yourself, in case you decide to take a course in organic farming in Provence or get a midlife master鈥檚 degree.
3 types of tax-advantaged college savings plans that parents should know about
Here’s an overview of the tax-advantaged college savings accounts you can use to help save for college.
529 plans
A 529 college savings account allows you to save money for college without having to pay federal tax on the earnings in your account, as long as you use the money to pay for your child鈥檚 higher education expenses. This includes tuition, books, fees, computer equipment for school, and room and board. If your child decides not to attend college, you can transfer the funds to pay for . However, if you don’t use the money to pay for education expenses, you’ll have to pay a 10 percent penalty on the earned portion of the savings and your withdrawals will be taxed.
There are two types of 529 plans: savings plans and prepaid tuition plans.
529 savings plans
Most states offer their own 529 plans, or you can set one up through a brokerage firm. The former tend to have lower fees, which can mean thousands more in savings down the road. 鈥淢y advice is to always go with the fund that doesn鈥檛 have an extra fee for the advisor,鈥� says Kobliner. Research shows the advisor is not giving you an added benefit, she says.
Anyone can open a 529 account, regardless of income. States may place upper limits on how much you can save in a 529 plan, but in most states the cap is more than $250,000 (total), which is much more than most people are able to save. You can even buy a 529 plan from another state if you like their plan better, but be sure you aren鈥檛 passing up any local incentive programs or tax deductions in your own state before you do that. You can compare different state plans on the website.
529 prepaid tuition plans
These plans allow you to purchase tuition at today鈥檚 prices. The plan invests your money in order to ensure that you will down the road. carefully before purchasing. Each state develops their own rules and they may place limitations — like a timeframe or an age limit on college completion — that won鈥檛 work for your family. It also limits the schools your child can choose from and the guarantees aren鈥檛 always rock solid, according to Kobliner.
Coverdell Savings Plan (ESA)
These can be opened for children under age 18 and allow you to save up to $2,000 per year per child toward education expenses. To qualify, your adjusted gross income must be less than $110,000 for a single parent, or $220,000 for a married couple filing jointly, so they aren鈥檛 for high-income families.
