Not sure which college savings plan is right for you? See also NerdWallet’s Best 529 Savings Plans of 2013.
by Charlotte Cannizarro
When most couples first learn that they are having a baby there are two thoughts that race through their minds! Will we be good parents? and How are we going to pay for a college education?
In today’s economy, it is more important than ever to begin saving for a college education. There are a number of practical ways to save …here are the top five tips that will get you on the right track:
- Be Realistic! Yes, the cost can be overwhelming at first glance, but payments for tuition occur over the course of the four years (for a undergraduate degree). Remember this rule: one third of college costs are from past income in the form of savings, one third from current income and financial aid, and one third from future income in the form of loans. Use this tip – base the amount you need to save on the average cost of college in the year of your child’s birth. This will account for tuition increases until your child reaches college age.
- Start Right Away! The sooner you start you more quickly the savings will add up with interest – so time is on your side. Setting up automatic payments will insure that your contributions are made on a timely and regular basis. Remember – it is never too late to start saving even if you can’t begin right away – every dollar you save is one less dollar you will need to borrow.
- Review Your Plan! If you can only save a little at first that’s okay. Saving something is better than saving nothing. When your life changes due to a raise, bonus, inheritance or even a lottery win make sure to redirect some of those funds to your college savings plan. Have a percentage in mind that is at least equal to the percent of your raise.
- Check Out a 529 Plan! A 529 College Savings Plan provides significant tax advantages since the earnings are tax deferred and distributions are tax free when it comes time to use them for college education expenses. The plan will most likely have very little impact on your child’s eligibility for financial aid. Tip – buy direct, not through a tax advisor. Look for ones in your state, as you can take a tax deduction. Also consider only ones with fees less than 1%.
- Make Asset Allocation Adjustments! You college fund will most likely begin with a mix of aggressive investments like stocks and then transition to a mix of more conservative investments like bonds and money market accounts. At the time you child enrolls in college the fund investment plan should reflect no more than a 20% investment in stocks. Remember – the stock market will experience ups and downs which will have less of an impact over time. Minimize potential losses by adjusting investments as the time for college draws closer.
There are also a number of college savings rebate programs, the most popular one being Upromise. This program offers a 5% rebate on all purchases made with the card when used to shop for items anywhere that display their logo.
Disclaimer: This article is a part of NerdWallet’s series of user perspectives on 529 Plans. The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet as a whole.