The idea of saving for a big-ticket item like college can be daunting. But if you start early, planning for your child’s education is really not as hard as it seems.
Setting aside $25 or $50 a month doesn’t seem like much when the cost of a four-year degree could exceed $100,000. But given time and interest, these savings could add up to a significant sum.
Don't Wait to Start Saving
Planning for your child can make all the difference. Parents who put off planning for college end up with major regrets. Experts suggest you start saving for college shortly after your child is born. If your child is getting ready for college, our college guide offers financial aid information for students and parents.
One of the biggest mistakes parents make is using their retirement savings to pay for college. But the reality is, there are more options to finance college than there are to pay for retirement.
You Don’t Have to Save the Entire Amount
The general rule of paying for college is one-third comes from savings, one third from current income, and the final third from a combination of student and parent loans. Using that formula is a good way to start planning for your child.
Explore Tax-Free and Tax-Deferred Plans
Like for retirement, there are also tax-advantaged savings programs for education. These pre-paid tuition or education savings plans have advantages and disadvantages, so do your homework to see which works for you.
The main benefit of this plan is that you won’t be taxed on annual investment earnings or withdrawals for qualified expenses. Contributions are not tax-deductible on federal return, but some states do offer an income-tax deduction for contributions and this type of investment can impact your financial aid eligibility. There are two types of 529 plans to choose from: A 529 Prepaid Tuition Plan gives you the option to prepay for college at today’s lower costs. A 529 College Savings Plan allows you to invest in your choice of professionally managed investment options, providing the potential for tax-free growth and distributions for the beneficiary. Click here for more information
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