It’s no secret that babies are expensive and between the immediate costs of diapers, wipes, food, and clothes, it’s no wonder parents are overwhelmed at the thought of saving for college 18 years from now. But thanks to the wonder of compound interest, the sooner you start, the better.
According to Collegeboard.org, the average private college tuition costs $31,231. Based on historical data, tuition is expected to rise 2.2 percent above inflation annually (not to mention associated fees like lodging, books, and food). So parents could be looking at costs approaching $100,000 per year. The time to start saving for college is now.
529 College Savings Plan
Popular 529 Savings Plans are operated by states or educational institutions and it typically doesn’t matter if you sign up for a plan in one state and your child wishes to attend school in another. Each state offers different plans and tax incentives, benefits, and features vary from plan to plan, so it’s worth researching to find one that fits your needs.
You’ll also have the option to choose from a savings plan or prepaid tuition plan. With savings plans, your money is invested for you, which means it will fluctuate with performance; prepaid tuition plans allow you to prepay all or part of in-state tuition now to lock in the price for future use. Among the many perks of a 529 Plan are that your money can grow tax-free and won’t be taxed on the other end when you pull it out for college.
These are accounts that parents (or custodians) can set up in their child’s name. Custodial accounts offer enormous flexibility because you’re in control. Parents can add savings bonds and cash children receive as early birthday presents.
Once your child is 18, they’ll gain control of the account and can choose to use the money as they please (not just for educational purposes, unlike the 529 Plans), but in the meantime, you’ll be able to decide where and how the money and dividends are invested. The downside is that earnings in this type of account are generally taxed annually and then again upon withdrawal.
Coverdell Education Savings Accounts (ESAs)
If your modified adjusted gross income (MAGI) is less than $110,000, then you qualify for a Coverdell ESA. Much like 529 Plans, your after-tax contributions will grow tax-free and can be withdrawn tax-free down the line for educational expenses. What’s more, funds from a Coverdell ESA can be used for elementary and secondary education, not just higher education like most college savings plans. Coverdell ESAs can be opened at any bank or IRS-approved entity that offers them.
Looking at your little bundle on day one and thinking about the massive expense looming in 18 years is daunting, so instead, adopt a marathon-not-a-sprint mentally and think about small ways you can start saving today. Try forgoing your pricey morning java (and make it at home instead) or look into programs that link your credit card and 529 Savings Plan, which adds a little to your 529 Plan with every purchase. All of those dollars and cents will add up significantly and your baby Einstein will be college-bound before you know it.
– By Stephen Reynolds, Editor