College Savings Options

The cost of a college degree has continued to rise, plus student loan debt is alarming. What are your options to save for your child’s college expenses? The cost of college is only going up, so early saving529 plans is a key.

One option is a 529 plan. Once you invest money, your earnings grow tax-free (similar to a Roth IRA). Keep in mind however that you will be taxed if you withdrawal the funds too soon or for non-educational purposes. A 529 plan offers two types of specific accounts: prepaid or savings.

529 Prepaid Plan

The prepaid plan allows you to invest money towards tuition at a limited number of colleges and universities. Essentially, the tuition at a particular school freezes and the price will not increase when the student enrolls in that school. One of the disadvantages of this account type is there is little flexibility. Students need to be fairly certain they want to attend a particular school for this account type to be the most advantageous choice. However, if they are fairly certain, the prepaid 529 plan helps keep their cost of college lower, even though it will definitely increase before they enroll. Something else to consider is that a prepaid plan only covers the cost of tuition and mandatory administrative fees.

529 Savings Plan

A savings plan is essentially an account meant for future use. The funds accrued in this type of account can be used for tuition, mandatory fees, room and board, books, and computers. As you can see, there are pros and cons of each plan. A savings plan allows more flexibility when spending funds, but a prepaid plan doesn’t provide limitless school choice options. It is a decision that just has to be made with your student’s best interest in mind.

Fees

There are other factors to consider when choosing which type of account you want, such as any fees that may apply. Certain fees could include an application cost, management, annual, or administrative fees. The more money you accumulate in your account, the possibility of higher fees increases with a savings account. A prepaid plan typically has fewer fees and does not charge investors for account management.

Plan Options

Nearly all states allow for tax deductions and credits for 529 plans. If your state doesn’t offer a tax deduction, you may want to consider investing in another state’s plan that offers options better suited for your needs. For a list of the best 529 plans, take a look at NerdWallet Investing’s comparison chart.

Contribution Limits

The maximum contribution per year is $14,000 per beneficiary, but if you are married, you can invest another $14,000 for a spouse, too, who is considered a separate, second beneficiary. The account, regardless of what type you choose, contributions are limited by states – somewhere between $200,000 and $300,000, but the investment may grow beyond that if the fund matures.

The price of college is not going down anytime soon, so it is best to save as much as possible before the first tuition bill arrives. A 529 plan is one option, and whether you choose a savings or prepaid plan, you will be glad you chose to save at all.

College Funding 101

college fundingWith the cost of a college education rising quicker than the inflation, determining how to save for college can be quite a chore. However, college is the best investment that can be made—individuals with college degrees make twice as much, on average, than those with just high school diplomas. So, the perilous road towards saving for college must be taken. Check out the following ideas to make saving for college a little bit simpler for you:

Where to Save

Some people prefer saving their money in bank accounts as opposed to stocks. With bank accounts, though there are no tax breaks, you can be sure that your funds will not be lost. Plus, over time your savings will, slowly but surely, increase.

 

Set up a 529 College Savings Plan

A 529 Plan is a popular state- or educational institution-run savings plan set up to aid families in setting aside college funds for the future. 529 Plans are available in almost every U.S. state, though it is up to the state whether or not it will offer a 529 Plan and these plans vary from state to state. These plans are extremely helpful, as they offer tax-free growth on investment. As long as the funds are used on for tuition, room and board, and other related expenses, there are no federal taxes on the withdrawal. Contributions to the 529 College Savings Plan is tax-deductible in many states. This plan is an easy, smart way to start saving for college.

Automatic Deposits

Have automatic deposits made from your paycheck into your college savings account or your 529 college savings plan. This way your periodic contributions won’t be skipped and your money will be safely accumulated.

Little Ways to Save

Encourage your family and relatives to contribute to your college funds instead of buying you gifts on holidays and birthdays. Though it may seem trivial, the money will steadily collect and be of great help to you. Note that you can get a tax break by donating to an in-state 529 Plan. If you are already on a tight budget and surviving paycheck to paycheck, see where you can cut costs in your monthly expenses. For example, are you eating out frequently, paying for an unused gym membership, etc.?  Little contributions to your savings make a big difference in the long run.

Aid from Schools

Don’t rely entirely on yourself to save up all the money that seems to be required. Contact the schools you are looking at and learn more about their financial aid programs. Several private colleges offer grants which could cut down your tuition significantly—to levels even lower than a public university, often times. Also, learn more about various scholarships available. You’ll be surprised to see how many scholarships are offered and the variety that they come in. Find a few scholarships that you might be interested in, or which suit your strengths. Even if you suspect that you may be able to get by without a scholarship, apply anyway, especially if you have a special skill or talent that you can cash in on—literally. There’s no harm done in applying, and if you do receive the scholarship, all the better.

More Tips

  • Several organizations including AmeriCorps, Peace Corp, and National Health Services Corps will, in exchange for a service commitment, give you college money.
  • Apply to several schools. This way, the chances are you’ll get into more than one, which means it is more likely that you may receive a hefty financial aid package.
  • Talk to your guidance counselor. They are there to assist you in the college application process and their expertise may aid you in figuring out how to fund for college. Of course, their advice is free, so make the best of it.