Paying for College: How to Start Saving Early

Still struggling with student loans from your own alma mater? We feel you. But if you’re a parent, it may be time to start thinking about saving for college again — whether you have a toddler or a tween — because college costs are still on the rise.

In fact, according to the College Board, in-state tuition and fees at public four-year schools have increased an average of 3.5 percent beyond inflation each year over the past decade, with no end in sight. While it can be tempting to just put your head in the sand and hope for the best — surely your bookworm or little slugger will earn a full ride, right? — the better choice is to try to do as much as you can now to get a head start on helping to cover those costs.

Below are four bright ideas to help you get an A+ in college savings.

1. GET EDUCATED ABOUT COLLEGE SAVINGS ACCOUNTS

   There are a host of savings vehicles available, each with pros and cons you may want to discuss with a financial planner or professional. But here are some of the most well known for college savings:

   529 Plan: State-sponsored 529 college savings plans potentially offer a double tax advantage: Contributions grow tax-deferred, and as long as the money is used for qualified college costs (like tuition, fees, room and board, and supplies), withdrawals are also free from federal income tax. These plans are considered a parent’s asset in financial aid calculations — a bonus since the student’s assets are weighed more heavily than the parents’ when determining financial aid eligibility.

   Coverdell Education Savings Accounts (ESAs): An ESA is a trust or custodial account that offers the same tax advantages as 529 plans, but your contributions are capped at $2,000 per child per year and are subject to income limits. You have more leeway with the funds in an ESA, which can be used for elementary and secondary education, as well as college. Note that if the account is in your child’s name, it will have more of an impact on his or her financial aid eligibility than a 529 would.

   Uniform Gift to Minors Act/Uniform Transfer to Minors Act Accounts: UGMAs/UTMAs are custodial accounts in which an adult can make investment decisions for a child until he or she reaches the age of majority (18 to 25, depending on the state) and becomes the account owner. It also offers a tax break for children under the age of 18. The first $1,050 in investment gains is tax-free, the second $1,050 is taxed at the child’s income tax rate, and any further gains are taxed at the custodian’s income tax rate. The funds can be used for anything that directly benefits the child, including, of course, college costs, although the assets would be considered the student’s for financial aid purposes.

2. MAKE SAVING A PART OF YOUR BUDGET

   No matter which vehicle you choose, it won’t fund itself, so commit to putting away a set amount each month that works within your overall budget. Even if you feel like the majority of your disposable income goes to disposable diapers right now, the more you can sock away early, the more those savings will have a chance to grow. Any amount you can save for college is always better than nothing.

3. GET YOUR CHILD INVOLVED

   Nothing is more powerful than having your children feel as if they’ve contributed to their own education. Talk with them about the importance of saving for college, and then encourage them to put aside a portion of their own paychecks or gifts — maybe even their weekly allowance — toward the cause. As the money grows, they’ll get a valuable lesson in compounding interest that they can take with them even after they graduate.

4. DON’T NEGLECT YOUR RETIREMENT SAVINGS

   This part’s actually for you. Make sure you’re not funding your kids’ futures at the expense of your own. While there are myriad ways to pay for college, such as grants, loans, scholarships or even help from relatives, you won’t have those options to fund your retirement. As they say, it’s important to pay yourself first, and that includes making sure your nest egg doesn’t get shortchanged because you’re worried about college costs.