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How to Start Saving for College

Posted July 10, 2012 by EasyFinance.com to Family Finance 3 0

Never has it been more important to receive a quality education than in today's society. As technology continues to advance, the need for skilled, college-educated individuals will only increase. A few decades ago, it was possible to receive a quality job without even acquiring a high school diploma. Now, however, it is growing increasingly difficult to gain employment even as a high school graduate. Job applicants with an interest in a specific industry but lacking college credentials will often be passed over for someone who does possess a degree, even one that is not specific to that industry. It is important to provide your children with all the necessary tools to succeed as adults; beginning to save for their college educations while they are still young, or even before they are born, is one of the most important early steps you can take to accomplish this goal.

Unfortunately, you should not expect a college education to come cheap. The total cost of a traditional four-year school now often approaches $100,000, a price tag that may increase further due to inflation by the time your child finishes high school. Discouraging though the total may sound, it is completely possible to save that amount without a crushing burden on your day-to-day finances. The early you begin, the easier this process will be.

Many have found education savings accounts a perfect tool for this crucial investment. These tax-deferred funds include limitations on the circumstances under which withdrawals can be made, eliminating much of the temptation to tap into the funds prior to college enrollment. Education savings accounts are set up in the child's name, so they may reduce the amount of financial aid your child may someday be eligible to receive, making it all the more important to regularly contribute to cover as much of the costs as possible. These funds also provide an incentive not to delay education, as penalties and income taxes are charged if your child fails to attend before a predetermined age. Their most important benefit is simply the fact that you can fund them with pre-tax dollars. If you are like most parents, choosing between saving your money for your kids' college educations compared to sending that money to the IRS is a no-brainer.

529 plans are another savings option for college expenses, but you should not establish one of these plans without careful consideration. These plans can be expensive and may sometimes be geared more toward profiting the broker than providing for your child's eventual education. With various charges such as annual fees, management fees and broker fees, a significant chunk of the savings will not be used for education. On the other hand, they do offer quite a bit of flexibility; most 529 plans allow you to make changes to your program every year, and some include options to pay in a higher annual tax-deferred amount compared to other types of educational savings account plans. Considering the duration of the investment you are planning, you should take your time and ask plenty of questions when choosing a savings vehicle to ensure that it will help you reach your expected goal.

Pre-paid tuition may be an option worth considering if you are concerned about the impact of inflation on future tuition prices. Many colleges now offer this option, allowing you to lock in that school's current rate years before your child would actually attend. However, it is worth noting that many state programs do include additional charges in prepaid plans. Furthermore, if your child decides he or she wants to attend college in another state, the college will assess you additional fees before refunding your money. It is also worth noting that this investment will generally only cover tuition, not housing or other expenses. Nonetheless, this type of college payment strategy can potentially save you a significant amount of money in some cases.

Another great way to save for college is by investing in education saving bonds. These reduce the risk associated with savings account plans in that they are set up in the parent's name. Therefore, if the child applies for financial aid they will not be negatively impacted. These plans also offer unique tax breaks for single parents who make less than $74,850.

It is important not to give up on savings when finances become tight. In the event of a job loss, divorce or other situation that can decrease your ability to set aside your normal amount, do not give up entirely. Even $20 per month is better than nothing at all, and it helps you maintain the savings habit. Those who give up during financial hardship tend to find it difficult to resume saving when times improve.

If your budget makes saving for college challenging, try taking advantages of unique rebate programs designed for college savings. Programs like Upromise reward customers of specific retailers with rebates that can be redeemed for 529 plans or cash to be used for college. These rebates will only total a small percentage of your purchases, so this method should not be your sole source of financing -- but every little bit will help.

No matter what specific tool or savings vehicle you use, starting a college fund for your children long before they reach college age is a smart decision. Many people faithfully contribute to their fund of choice every month, but upon advancements in their careers and salaries, they do not increase their contribution. To minimize college's financial burden, you should attempt to increase the percentage you can add to your education savings, 529 account or other form of college fund every time your salary or other form of income grows.

There are many options to choose from when deciding how to invest in your child's future education. Each option brings with it unique risks and benefits, and no plan can be deemed "the best" for all cases. Certain plans simply work better for some family situations than do others. Taking the time to carefully research the available options can help you save money as efficiently as possible to put your children through college and to give them a head start on reaching their potential.

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Rob Fink 2012-07-13 09:02:36
Another great way to save for college that is just starting to become popular is IUL (Indexed Universal Life.) It's a special kind of policy that protects your money from loss (unlike 529 plans) but still let's your money grow when the stock market improves. And money you take out is tax-free, and can be used for more than just college.
PeterV 2012-07-15 08:34:46
This is a great start on the basics of education planning. As a 30+ year senior leader in the financial services industry, I have learned that it breaks down to 3 things. First, parents need to create discretionary income to save - keeping expenses and debt under control. Second, they need to save systematically, keep it saved, and invest for the long term in tax advantaged ways. Lastly, for most - they will need some help outside of there own saving. A new resource to help with this is: collegeregistry.fipath.com. This tool help not only calculate costs and savings needs- but provides an easy way for family and friends to help contribute based on gifts on life moments like graduation....

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