It’s a truth universally acknowledged that one of the best ways to pay for college is to save for it, and the earlier you start saving for college, the better. So now that you’ve decided to open a college savings plan, what are the best ways to go about starting one?
Take Action to Cut the Cost of College
The first step in starting a college savings plan is to determine roughly how much you’ll need. This year the College Board reported that the average cost of a private four-year school is $25,143, with the cost of a public four-year school averaging $5,585.
As if that wasn’t bad enough, the price of tuition keeps getting higher each year. If you’re just starting to save now, it might be unrealistic to accrue enough savings to cover the cost of all four years—or even more—but it’s never too late to save for your future.
The next step is to figure out how much time you have left before you begin college. This will help you determine how much you need to set aside each month. The further away your enrollment date is, the less you will absolutely need to put into the account. However, it’s never a bad idea to put as much as you can each month.
Investigate College Savings Plan Options
Next, it would be beneficial to research all your savings choices. From 529 Plans to Coverdell Education Savings Accounts there are a ton of options out there. Discover which one is right for you based on your state’s programs, your needs and tax benefits. Not many students know about 529 Plans, and it can be tricky to understand how these work in regards to performance, fees and expenses, minimum contributions and state tax deductions.
In Whose Name to Should You be Saving for College?
The financial aid formulas used by schools assess a portion of your family's assets when computing eligibility for financial aid. There are significant benefits to putting savings accounts in the parent’s name, despite the slight tax savings of the your lower tax bracket—meaning assets belonging to a dependent child are taxed lower than those of your parents.
Although some plans don’t penalize your parents for transferring savings to your name, such as 529 Plans, which allow your parents to “gift” up to $55,000 a year without incurring hefty gift taxes, putting assets in your name could result in a reduction in eligibility for financial aid. If you and your parents are absolutely sure you will not qualify for financial aid from your school, it could be a wise investment to place the savings in your name.
Remember a good rule of thumb is the one-third rule, in that you should expect to save one-third of the expected college costs, pay one-third with current income and financial aid during college and expect to borrow one-third. So don’t worry if you aren’t able to save the entire amount to cover the cost of college.