College Financing — Saving for College

Saving for College

As the cost of college only increases, it makes sense to start college savings as early as possible—even if your future scholar is still in diapers. However, don’t let a late start stop you. If your child is starting high school and you haven’t been able to stash away any college funds, don’t think it’s too late. Any amount you can save will reduce the amount you need to supplement with loans and scholarships.

To get started, here are some popular college savings plans*:

• State 529 plans—Named for the part of the IRS code that created them, these plans allow you to put away savings for your child to pay for post-high-school education. The student can go to a school in any state, and the withdrawals won’t be subject to federal tax. Family and close friends can also sign up to contribute.
  
• State 529 pre-paid tuition programs—This program lets you lock into today’s tuition price at your state’s university. Regardless of tuition costs at the time your student begins college, you pay today’s rate and the state makes up the difference. If the student chooses a private or out-of-state school instead, the accumulated savings can be used toward tuition, but the state won’t guarantee to make up the difference.
  
• Coverdell Education Savings Accounts—These are tax-free savings accounts that allow you to put away $2,000 per student per year and use the money for elementary, secondary or post-secondary education expenses. There are eligibility restrictions: only couples with adjusted gross income of $220,000 or less, and individuals with a gross income of $110,000 or less, qualify.
  
• Roth IRA—Many people use a Roth IRA to save for retirement, but they can also be used as a college-savings option. The money you have saved in a Roth IRA isn’t assessed for financial aid purposes and, unlike traditional IRAs, you can access your savings penalty and tax-free for things like education. So, as you’re evaluating college financing options, you can look at the balance of your Roth and decide if you want to use some of the money for education rather than retirement.
  
• Individual Development Account (IDA)—Restricted to low-income families, these are accounts in which non-profits, in partnership with a local bank, match contributions to a savings account.

Consumers looking for personal financial advice about saving for college should contact a professional financial advisor.

Tips to help boost your kids’ college funds

• Establish a goal. If you specify a savings goal, you'll be able to measure your progress.
• Save regularly. Set up automatic withdrawals from your paycheck or checking account into the college fund, and then forget you ever had it. It will become part of your monthly budget and the money will begin to add up.
• Ask relatives to help. Invite grandparents, aunts, and uncles who give birthday or holiday gifts to limit giving to one toy or book, and donate the rest of what they would have spent to the child’s college savings fund.
• Redirect old regular payments toward your savings goal. Whenever you have a regular payment that stops, try shifting the money you were paying into your college savings. For example, when your children enter kindergarten, redirect the money you were spending on daycare to college savings.