Saving for college tuition is an integral part of giving your child the chance to pursue their goals without becoming burdened by student debt. Although this process necessitates dedication and hard work, the results are worth all the effort.
As a beginning, you should begin saving for your child’s education as soon as possible. However, this may prove challenging for some families with limited income from part-time work or no savings at all.
1. Start Early
With college tuition rising at an annual rate of 4 percent, now is never too early to start saving for your child’s future education. The most advantageous way to do this is through a 529 plan–a tax-advantaged account designed specifically to assist in saving for college expenses.
Jim Ciprich of RegentAtlantic Capital suggests the best way to begin is by contributing money into a 529 plan on a monthly basis. But if that isn’t feasible, he suggests diversifying your savings by using any extra funds you may have saved over time.
He suggests this could include investing one-quarter of a tax refund or merit raise into a 529 plan, as child care costs tend to decrease as children age. Furthermore, you could put any leftover money – like change between sofa cushions – into your child’s piggy bank.
2. Put Money Into a 529 Plan
A 529 plan allows you to save for college tuition without incurring any tax penalties. These plans are usually administered by states and can be used to pay qualified education expenses like tuition, textbooks, room and board.
Anyone can open a 529 account, including yourself or family members. However, in order to do so, the beneficiary must provide their Social Security number (or tax identification number) and date of birth to the plan administrator.
Once your account is opened, you can make deposits as often as desired. You also have the option to make lump sum contributions on birthdays, holidays or other special occasions.
Investment options within a 529 plan differ, so it’s essential to find one with an array of strategies designed to help you reach your savings goal. Some plans provide age-based investing choices; others might feature a combination of conservative, moderate and aggressive portfolios.
3. Use a Tax-Advantaged Account
One of the most efficient ways to save for college tuition is through a tax-advantaged account. These accounts offer numerous advantages and are especially suitable for long-term investors who won’t touch their investments for years or even decades, since they can shield investment earnings from federal income taxes until withdrawn.
Tax-advantaged accounts come in many forms, such as individual retirement accounts (IRAs), 401(k) plans and 529 plans. Each offers unique advantages so make sure to select the right option for your financial situation.
4. Set a Savings Goal
Savings goals are critical as they help you prioritize how much money you save and keep track of your progress.
College tuition is a significant financial commitment, so it’s essential to set yourself some savings goals. These could range from something as straightforward as buying a new car or taking vacation, to more complex matters such as having enough saved for retirement.
Many people underestimate how much they should save for college, so it’s wise to estimate this amount ahead of time.
From College Board data, you can estimate how much it will cost students to attend either a public or private four-year university in 2021-22.
Some experts advise saving one-third of a child’s college costs over 18 years. Others suggest devoting part of your income while they’re in school and borrowing the rest via federal loans.