Saving up enough money for your future child’s college career seems like a daunting task. College tuition is climbing at a shocking rate, and experts expect it to keep going up over the course of your child’s lifetime. But that doesn’t make saving for college impossible, and the reality is most college graduates see significant economic benefits from that degree, which means it’s still a worthwhile investment to make.
Nevertheless, scraping the money together is challenging. That’s why parents are starting savings accounts earlier and earlier and making them absolute priorities for children. It’s now become part of the routine of bringing a new child into the world. Prepare a room, get a crib, set up a college savings account, bring home baby. Almost three-quarters of parents are putting away at least a few hundred dollars a month for their kids, indicating that everyone is taking this new necessary expense seriously.
Here are some tips on how you can save up for your baby’s future college career.
Make a 529 account
For many parents, the first plan of action is a 529 account. Just over 40 percent of parents have set up a 529 account, an investment account that allows you to set aside money for your child’s college education without having to pay taxes on it. How much you can contribute to the account ranges by state, from $250,000 and above, but most limits are well above the total cost required for a standard, four-year public college degree.
There are a few key things to keep in mind when it comes to maximizing your 529 account. One is to remember that you cannot utilize multiple kinds of tax benefits on the same educational costs, which means you shouldn’t use your 529 funds until you spend $4,000 in educational expenses so that you can maximize your tax savings from the American Opportunity Credit.
In addition, parents should also remember that putting money into the 529 account doesn’t have to end once your child gets a high school diploma. If you intend on paying for all your child’s college expenses, continue to save into the 529 plan even as he goes through his first years of high school.
Look into prepaid tuition
Another popular college savings vehicle is the prepaid college tuition plan, which locks in a rate for a percentage of the total tuition for state colleges and allows parents to pay a certain amount without having to worry about rising tuition costs. This option is a boon to parents, particularly parents who act sooner rather than later. Tuition is expected to skyrocket, along with student housing choices, which means locking in rates as early as 18 years in advance can help significantly reduce your overall bill, particularly if your child happily agrees to attend a state public college.
Prepaid tuition plans are a great savings technique, but they do come with a few downsides. For one thing, their use is limited to public schools in the state parents set it up in, which means your child won’t have the freedom to apply to public colleges in other states.
Should your child choose to go to a school not in the prepaid plan’s network, you will be able to take out the money and put it towards his or her tuition, but it won’t go nearly as far as a plan that’s automatically covering a pre-agreed upon percentage. Only a few states allow students to benefit from a college prepaid tuition plan if they’re out of state, but the students have to qualify for in-state tuition by the time they attend. Whatever savings plan you choose depends on what feels like the best option to you. Prepaid tuition plans and 529 plans each have their own positives and drawbacks, but either would be an excellent choice to your overall college savings plan. Education is expensive, and it’s only going to get more expensive - it’s best to start preparing now.