College Bound

Even if Junior isn’t heading to college for eighteen years, it’s time to start thinking about building some education savings now. With the help of 529 plans, saving for your children’s education has never been easier.

How Much Do You Need To Save?

US News and World Report estimates that in eighteen years the cost of tuition, fees, room and board for five years at a public university will be above $90,000. Yikes! Today, with a newborn and no savings, you would need to save $1,186 each month in order to have all the cash required to send the bouncing baby through college in eighteen years. If you wait until Junior is six years old to start saving, you would have to put away $1,983 a month in order to achieve your goal. Calculate how much you need to save for college.

But wait! Don’t despair just yet! It’s not very realistic to assume that you’ll save all the money needed for college in advance. You will not have to pay all of the college costs upfront; rather, you will pay tuition each semester or academic year. Your child may get some scholarships to reduce the price of school, and there are low APR student loans and federally subsidized loans to help cover tuition and other expenses. Let’s say that your savings goal goes down to $40,000 when you take these variables into consideration. In order to save this amount, you’ll only have to put away $527 each month for the next eighteen years.

Start Early

Just like retirement savings, the earlier you start, the better off you are. If you start saving for college as soon as your child is born, you can put away a lot less each month and still achieve your goals. This is due to the longer period that your savings will earn interest and the longer period that you are contributing. If you wait until your child is older, you’ll have to play catch-up and save a lot more each month.

529 College Savings Plans

Saving for college is even easier when you use a 529 college savings plan to invest your money. With these plans you don’t have to pay taxes on the account’s earnings, you always retain control of the account, and there are no income limitations. Plus, you can use the education savings for any member of your family, at any age. Because 529 plans can vary state to state, check with a financial advisor about which program is best. Education Savings Accounts (a type of IRA) are another option, but they come with limitations and are less flexible than 529 plans.

Other Options

You may also be able to use some of your 401(k) savings for college expenses. Cashing out your 401(k) savings comes with expensive fees, but you can borrow against your retirement savings fairly affordably. In most situations, it’s better to use a 529 plan or a federal student loan for college costs instead of tapping into your 401(k).

You may also want to consider signing your friends and family up for a savings program like Upromise or BabyMint. This program works by having large companies give a portion of the money you spend with them to a college savings fund. Sign up online for free, and when you shop with participating companies you can earn up to 10% back in college savings. Plus, both programs also offer 529 plan options. You don’t have to be a parent or even a relative of the child to participate in the savings.

The Most Important Step

The most important step is actually getting started. If you are feeling overwhelmed, you can start by automatically putting a few hundred dollars in a savings account each month. Saving even a small amount now in a basic account is better than waiting a few months or years to finally open a 529. Start saving for your child’s college education today!