One of the biggest misconceptions that parents have about kids and college is that saving should start while that child is attending high school. Although you would find a number of excellent programs that would be beneficial if you were to wait until high school to start putting money aside, the truth is that you should begin saving for college the day your child is born. With the cost of a college education rising and financial assistance options being reduced or eliminated, you have to take action quickly.
Of course, you could start by opening a high yield savings account, which is certainly a viable option but it is important to know that because saving for a child’s college education is such an important goal, a number of special programs and plans have been developed to make this a more attainable goal. Because of that, we felt it important to offer you some information so that ultimately, you get the most “bang for the buck”.
One important note is to remember that not one single savings plan works for every family. In other words, just because you have a friend who tells you there is only one right way to save money for your child’s college education, remember that too many factors are involved. Therefore, it would serve you best to consider a variety of solutions so that you have the opportunity to choose the saving plan that works best for your working budget, as well as the school of which you think your child would be interested in attending.
Because of the various offers, one of the first things you want to do is determine the amount of money you would need to put your child through college when he or she is ready. Although the numbers would not be 100% accurate simply because no one can predict what college will cost years down the road, we suggest you use today’s cost of tuition and then add 10% to 15%. Once you know the approximate amount of money needed, you can then begin searching for the right investment or saving opportunity.
Keep in mind, saving for your child’s college is not only going to be based on the amount needed, but also your tax bracket, the number of years you need to save, the level of control you prefer to maintain over investments made, and whether or not you plan using some form of financial assistance. Along with a standard high yield savings account, we would encourage you to look into 529 plans. These plans are offered in every state although criteria and funding amounts differ. Other options would include Coverdells, which were formerly known as Education IRAs, Uniform Transfers to Minors Act or UTMA, Uniform Gifts to Minors Act or UGMA, and a variety of other custodial type accounts.
It is imperative that you stay realistic about the amount of money you could save. It is also important that you realize from the time you begin saving for your child’s college education to the time he or she actually attends a college or university many things could change, especially in the area of government financial aid. You also want to remember that no matter the amount of money you make, there are several great plans that exist currently and are expected to be around for many years to come. Just to give you an idea of what to expect, we have provide examples for different tax brackets.
Lower Tax Bracket
If you fall within a lower tax bracket, tax deferred accounts would be of not benefit to you simply because the amount of income tax you pay is not enough to matter. Being in this tax bracket means saving a large amount of money for your child’s college education is going to be somewhat of a challenge, but not impossible. For this scenario, we suggest you look into various financial aid options, make sure any savings account stays in your name although the money would be for your child, consider 529 and Coverdell plans, and if possible, pay extra on the home mortgage to increase the amount of equity that could then be borrowed against.
Middle Tax Bracket
If you fall within the 25% bracket, meaning as a single parent you make a medium income of $82,000 or as a married couple, $137,000, then you could still look into 529 plans to help your child get into college. For this, money invested is tax deferred and tax free if withdrawn to help pay for costs of college. You could also consider a Coverdell Education Savings Account whereby tax deferred and distributions would likely be tax free.
The bottom line is that regardless of the amount of time available, colleges or universities in which your child shows interest, area of study, amount of tuition, and geographical location, there will be some obstacles to overcome. However, by being flexible and creative, as well as looking at all your options for getting your child through college, you will be amazed at how the money comes together so the goal is reached.