You’re going to need a lot of cash to get your kid through school. Here’s how to achieve college savings success without going into debt.
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More than $145,000: That’s the approximate cost to send your freshman to a moderately priced, in-state public college or university according to The College Board. It includes room and board but not a lot of other things like books, travel to and from, Saturday night pizza and beer. The cost of a public school if you’re out-of-state or a private college or university can soar far higher.
And all of that is counting on the fact that your child will actually graduate in four years — these days it often takes an extra year or more for students to make it through. Bottom line: You’re going to need a lot of cash to get your kid through school. Here’s how to get there without going into debt.
How to Approach College Savings
1. Start Saving Now
Even if you can only put away $25 to $50 each month, get that money invested in a 529 college savings account. Setting up automatic contributions will make saving a habit, and the dollars will add up over time thanks to the tax-free investment growth they get when used for qualified education expenses.
What is a 529?
A 529 is a tax-advantaged savings plan — named for the section of IRS code they fall under — designed to encourage saving for future education costs, according to the SEC.
We started saving in a 529 for our 7-year-old when she was born, and when she graduates from high school we anticipate to have around $10,000. A nice jump-start on paying for books if nothing else, but we still have a long way to go to reach the $145,000 mark.
HerMoney co-founder Jean Chatzky, financial editor of NBC Today, says not to feel bad about that. “Although it’s admirable to want to save all the money your kids will need for college, your retirement saving has to come first. There’s no financial aid for retirement.” She suggests trying to save about a third of the overall cost, then strategizing a way to pay for one-third out of current cash flow when your child is in school and covering the final third with financial aid.
Want to create a college savings target for your family? Try the world’s simplest college cost calculator.
2. Find the Right 529
A 529 plan is the most popular college savings tool for good reason: It provides tax-deferred investment growth, and distributions used to pay for college (and some other qualified education expenses) are federally tax-free. 529 plans are offered by each state, and you can invest in any state’s 529 plan. But some are better — in terms of investment performance and incentives — than others. For example, we live in Florida, but we invest in the 529 from Virginia. About 30 states offer a state tax deduction for residents who contribute to the plan. Sites including savingforcollege.com and morningstar.com allow you to compare 529s across the states to see which has the best benefits for your needs.
What counts as qualified education expenses that can be paid for with 529 plan withdrawals?
Qualified education expenses, as they related to 529 plans, include post-secondary education costs including tuition, room and board, technology items, and books and supplies.
3. Check Out Age-Based Investment Options
Make sure you’re putting the money you put into the 529 plan to work.
Like 401(k)s, 529s plans offer a wide range of investment options. Typical 529 plans will have age-based investment options that automatically rebalance, taking more risk when your child is young and less as college gets closer. These work much like the target date funds you’ll find in 401(k)s. If you have a financial advisor, make sure you keep him or her in the loop to make sure you’re still on track to hit your goals. As your income goes up, you can and should bump up the money you’re putting into the 529 as well. And, don’t hesitate to tell grandparents, aunts, uncles and anyone else who regularly gives your child gifts that you’d love them to consider padding the 529 instead of, say, the closet or toy box. Websites including giftofcollege.com and leafsavings.com make it easy to contribute. Or, they can just write a check for you to put in: Every little bit helps.
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