Plan Ahead for College

Saving a dollar today is better than borrowing one tomorrow—particularly for college. Here are three tips to help you build a nest egg for college.

1. Start today, no matter the age of your child. Families with younger children sometimes fall into the trap of thinking saving for college can be delayed because they have many years to catch-up. Unfortunately, the lost time cannot be regained. A family that saves $1,000 on a child’s first birthday and adds $100 per month until the child turns 18 will save approximately $31,200 assuming a 4% interest rate and daily compounding. If they start on the child’s fifth birthday, the nest egg will be approximately $22,150 and only about $12,700 if they wait until the 10^th Birthday. Some parents of high school students mistakenly believe it is too late to start saving. Savings may reduce student loan debt dollar for dollar. A freshman borrowing $1,000 at today’s rate (4.53%) will repay approximately 1.5 times the amount borrowed. Reducing a student loan by $1,000 will result in not spending about $1,500 on interest and principal to pay-off the loan.
2. Pick a savings plan that works for you. Some college savings plans, including 529 Savings Plans and Coverdell Education Savings Account, benefit from substantial tax advantages. On the federal level, the investments grow tax free over their life and can be withdrawn without paying taxes as long as they are used for school-related expenses. Many states also sweeten the pot with tax breaks. 529 plans are very popular among college savers, but there are other ways to save for college. In addition to purchasing U.S. Savings Bonds, college savers use traditional brokerage and bank savings accounts.
3. Crowdfund. Saving for college is a family affair. Encourage relatives and friends to include college savings in their gift baskets for birthdays and holidays. Some credit cards also direct cash back rewards to college savings. Most 529 plans have online gifting programs and accept deposits from gift cards that may be purchased at retail stores.

Your family can achieve the dream of an affordable college by saving for college. The keys: start today, pick a good plan and enlist the help of others.

Learn more in the College Planning Center.

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