College is one of the most expensive investments there is. Many parents try to save for their children’s college, but the reality is, they aren’t doing a very good job. As a result, many students choose to go into debt to pay for college and student debt is arguably one of the worst types of debt to have.
According to the College Board, the cost of tuition and fees during the 2013-14 school year $30,094 for private colleges, $8,893 for state residents in public colleges, and $22,203 for out-of-state residents attending public colleges. At that rate college education could cost anywhere from $35,572 to $120,376 for a four-year degree.
In Fidelity’s 2013 Annual College Savings Indicator report, the average family creates financial plans that will pay for 62% of their children’s total college costs. However, the report shows that actual savings are on target to only cover 34% of costs. In other words, most families are not saving enough for their children’s college. Are you? If not, here are some ideas to help you avoid the college saving mistakes of others.
Using 529 College Savings Plans
In 2013 there was a 28% increase in families that started saving for college using a 529 college savings account. 529 plans are tax-deferred investment plans, meaning you don’t pay taxes on your contributions. Unlike other tax-deferred investments, when you finally use your savings to pay for college expenses, you still don’t pay taxes. There are two main types of 529 college savings plans:
Savings Plans function very much like a 401k or IRA. You invest your contributions in mutual funds or similar investments. Starting an account early has much better benefits because you will benefit from the compounding interest over time. On the down side, these types of plans come with risk, meaning your investment could go up or down with market dynamics.
Prepaid Plans allow you to pre-pay part or all of college costs for an in-state public college education. Some plans can also be converted for out-of-state college education.
Tips to Ensure you Save Enough Money for College
Start Early. If you wait until your kids start high school to begin saving for college, you’re in trouble. That’s why it’s best to start saving as early as possible. In fact, it’s actually easier. Saving over a longer period of time means lower monthly commitments. Simply contributing $100 a month every month, beginning when you’re child is born, will result in over $21,000 when they turn 18.
Diversify Savings. Just like other financial investments, diversity is safer. Consider using 529 savings plans and traditional savings plans in conjunction. You could even setup ways that allow friends and family to contribute to college funds as birthday and holiday gifts. Diversifying your savings can be helpful for more reasons than one. If some of the expenses don’t meet the requirements of “qualified education expenses” you can’t use funds from a 529 account.
Automate Savings. Create ways to automatically contribute to your children’s savings account. Setup automatic transfers from checking accounts, paycheck deductions, etc. Some credit cards offer “rounding up” methods that allow you contribute portions from your purchases to bank accounts.
Ask Kids to Pitch In. You should encourage your children to save for their college as well. Once they start working, sit down with them and help them create a modest savings plan that doesn’t force them to give up their entire budget. This will also be an early lesson in money management.