Parents with Young Children: Important Tips for Saving Money for College

Brian Jenkins has been a member of the BrainTrack writing team for two years. He is an expert on education topics, including financial aid for college.

When should you begin saving for your child’s college education? Start saving as soon as your child is born. Time is a vital asset. The sooner you begin saving money for college, the more time your money has to grow. Some experts suggest saving between $100 to $250 per month per child. If you save $250 per month for ten years at a five percent average return on investment, you’ll accumulate close to $39,000. Of that, close to $9,000, or 23% of the total, is from earnings on the interest.

After you’ve determined your college savings objectives, use a college savings plan designer calculator to determine the amount of money you need to save every month.

529 College Savings Plan

Every state has what is called a section 529 plan. Section 529 plans are also known as Qualified Tuition Programs (QTP). The earnings in a 529 plan account are tax deferred and distributions are tax free if they’re used to pay for qualified higher education expenses.

The prepaid tuition plan version lets you lock in future tuition fees at in-state public colleges at current prices. They’re typically guaranteed by the state, although they do not guarantee admission to college. However, prepaid tuition plans can have a harmful impact on need-based financial aid. The college savings plan version is more flexible and has a minimal impact on need-based financial aid eligibility.

Find out if your state’s 529 plan provides a state income tax deduction for contributions to the state’s plan. Avoid advisor-sold plans which add on commissions and fees which can consume the tax savings.

A group of over 270 private colleges provide a national prepaid tuition plan for private and independent colleges called the Private College 529 plan. The plan allows parents to lock in college tuition at current prices.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts, previously known as Education IRAs, are trusts designed exclusively for the purpose of paying the qualified education expenses of the beneficiary of the trust. Earnings accumulate tax free and distributions are exempt from federal income tax. The account has a maximum $2,000 contribution per beneficiary from all sources per year. Contributions must be in cash.

Loyalty Rebate Programs

These programs combine small rebates from your credit card purchases and place them into your college saving plan. They keep track of the credit card purchases you make with participating merchants. The Upromise website, provided by Sallie Mae, is a popular college rebating program. You get rebates from buying groceries, shopping online, and other types of purchases.

Place a portion of your income tax refund into the college savings account. Consider placing some or all of the money from the Child Tax Credit and the Credit for Child and Dependent Care Expenses into the college savings account. Also, consider redirecting money from day care, after it’s no longer required, to the college savings account.

Age Based Asset Allocation Funds

These funds begin with an aggressive mix of investments (mostly stocks) and gradually become a more conservative mix of investments (primarily bonds, money market accounts, and CDs) as your child gets closer to enrolling in college. If the stock market does poorly when the child is young, there is still time to recover from the losses. However, some parents prefer all or most of the money be placed in safer investments such as government bonds.

Savings Account in Child’s Name

There are some tax advantages to saving in the child’s name, however your child will experience a loss in eligibility for need-based student aid.

Develop a comprehensive college savings plan for your child and begin saving money as soon as he or she is born. You’ll be glad you did.