Did you know that the average cost of a four-year university for in-state students is roughly $40,000? If your child decides to go out of state or to a private university, that four-year total skyrockets to over $100,000. For most parents, these totals can be daunting, but keep in mind, most families rarely pay for their child’s higher education completely out-of-pocket and there are tax incentives for those parents who start saving early.
Preparing for Your Child’s College Savings
Many parents struggle with when they should start saving for their child’s college tuition. The real answer is, it’s never too early. The sooner you start saving the easier and less stressful it will be when your son or daughter heads off to college. However, there are some things you should do first to assure you and your family are financially stable before you begin saving.
- Contribute at least 10% of your paycheck to retirement
- Pay off high-interest loans (credit card debt)
- Pay off your own student loan debt
- Start an “accident fund” in case of emergencies or unexpected expenses
How to Save for Your Child’s College Tuition
Now that you’ve taken the steps to stabilize yourself financially, it’s time to talk strategy. The cost of tuition increases year over year, so investing in a college savings plan can help you get ahead of the game before that first acceptance letter arrives and receive tax advantages, including state income tax deductibles, in the meantime. Take a look at a few of the college saving plan options below.
Prepaid Tuition Plan:
If you know your child will be attending college in-state, you may want to consider the 529 prepaid tuition plan. Your contributions essentially buy tuition credits that can be used later at specific colleges or universities. If your child decides not to attend an in-state institution, your money can be used at another covered college or university or can be used by a sibling.
College Savings Account:
Officially known as the North Carolina College Savings and Investment Program, this program is open to residents of any state and funds can be used at eligible colleges or universities within the country. You decide when and how much you want to invest, with a contribution minimum of $25. Account earnings can be used for:
- Tuition and fees
- Room and board
- Computers and associated equipment
- School-required supplies
Coverdell Education Savings Account
One of the simplest ways to prepare for your child’s higher education expenses is to open a savings account. A Coverdell Education Savings Account works similarly to a 529 plan and is a type of trust or custodial account that is specifically for a child’s college education. Here’s what you need to know:
- Coverdell ESA’s can be opened for any student under the age of 18
- All assets must be withdrawn by the time the beneficiary turns 30
- The annual contribution limit has a maximum of $2,000
- Parents, grandparents and other relatives can all contribute
Unlike 529 plans, these contributions are not tax deductible. However, like a Roth IRA, amounts deposited grow tax-free until withdrawn. Withdrawals are generally tax-free to the extent that the amount is not more than the beneficiary’s qualified education expenses.
If you choose to open a savings account at your local bank there are simple things you can do to make sure that money grows over time. This is a great way to have easy access to your savings and generate interest. Here’s what you can do:
- Automatically deposit part of your check each month into a savings account using direct deposit
- Set monthly or yearly goals
- Increase contribution amounts as your child ages
- When your child begins working, have them contribute to the account as well
Your children will be applying for college before you know it. Make saving for your child’s higher education a habit. Include it in your monthly budget, even a small weekly amount will add up over time. Just remember, the sooner you begin, the easier it will be in the long run.