If you’re already worried about paying for college while you’re still buying diapers, there’s help for that. You can start saving now, and you can do more than putting your change in a jar with clip art of a mortarboard taped to it. Here are a few ways to get started now.
Use a 529 Plan to Save for College Early
The 529 college savings plan, named for the section of tax code that outlines the plan, is a way to put money aside for your child’s college education and take advantage of a few tax benefits to do so. Most 529 plans are sponsored by a state, but in general you can enroll in any 529 regardless of what state you or the beneficiary lives in. There are “direct-sold” plans available for anyone or “advisor-sold” plans provided through financial advisors.
A 529 plan is a tax-deferred savings account, giving it an edge over putting the money in an ordinary savings account and earmarking it for college expenses. Withdrawals are also tax-free as long as they are used for qualified educational expenses. Many states offer additional incentives with a 529 plan, most commonly a deduction on your state income taxes so you may want to find a tax calculator to determine that. In addition, individuals can contribute up to $13,000 per year without incurring a gift tax, and those married, filing jointly can give $26,000 per year with no gift tax. There are no income restrictions and you can open a 529 plan with as little as $25, so it is accessible and affordable to anyone.
Coverdell Education Savings Account
A Coverdell ESA is a savings account designated for the beneficiary’s educational expenses, similar to a 529. One important difference is that the per year contribution limits are much lower – up to $2,000 per year- and the allowable amount depends on the individual’s modified adjusted gross income (MAGI). Multiple Coverdell ESA accounts may be established for one beneficiary, but the total amount contributed each year cannot exceed $2,000 or the amount allowed based on MAGI. In both Coverdell ESA and 529 accounts, the money does not belong to the beneficiary but rather to the account holder, an important distinction to increase financial aid eligibility, since parents are generally expected to contribute 6% of their assets versus the 35% of the child’s assets. In addition, the account owner can change the beneficiary of the account without penalty if the new beneficiary is an eligible family member of the original beneficiary.
Qualified education expenses for a Coverdell ESA are not limited to postsecondary education but also include any K-12 educational expenses, making it ideal for those hoping to send children to a particular school that might otherwise be financially out of reach. The Coverdell ESA also has an age limit, while most 529 plans do not; the balance of the Coverdell ESA must be disbursed on qualified expenses before the beneficiary reaches age 30. If not, the remainder is subject to additional taxes and penalties.
Save for College Early With Upromise
Socking away cash for college far in the future can be especially difficult for those struggling to make ends meet now. Instead, you can save for college by earning rewards on regular everyday purchases. Upromise is an account you can set up to earn cash back when you shop at partner stores, including many grocery stores, drugstores, clothing retailers and hundreds of online retailers. Sign up with a credit or debit card, use that card to pay for eligible purchases and automatically earn 2-10%, small amounts that add up to something big. In addition, you can invite family and friends to link to your account and contribute cash back on their purchases.
The money from your Upromise account can be disbursed into a 529 or high-yield savings account. When the time comes, you can use the account to pay tuition or request a check to use for living expenses.
Save for College With a 401K
Perhaps the wisest choice for parents hoping to provide an education for their children is to invest in their retirement. Many adults are just beginning to really think about the financial reality of retirement when their children are preparing to leave the nest. Colleges do not count retirement savings when evaluating a family’s ability to pay for a college education, and a parent who hasn’t started saving for retirement early will have to play catch-up in later years, making it more difficult to support a college student’s tuition and living expenses. Most companies offer some level of matching funds to employees who direct-deposit a portion of each paycheck into their 401(k). If you’re not saving the maximum amount that the company will match, you’re giving up free money. Regular savings into your own retirement account will help ensure your own financial stability and put you in a better position to assist your child in covering the costs of higher education.
Paying for college is a constant worry for many students and their families. Ever-increasing tuition feeds fears of being “priced out” of an education and the chance for a personally fulfilling and financially substantial career. Advanced planning is key; financial stability has to precede college savings, but the two are not mutually exclusive. There are options for those in all income brackets to help students prepare for college, financially at least. The rest is up them.