Today it's diapers, tomorrow it's a diploma. When you look at your new baby, saving for college may be the last thing on your mind, but as the cost of college continues to rise, parents must start saving for college early. The earlier you start, the more your money will grow and help ensure that your baby has a fully funded college fund when it comes time to get that degree.
How Much to Save
A 2010 report from Fidelity Investments determined that a family making $75,000 a year would have to save approximately $2,250 a year, or $190 a month, for 18 years to have a college savings plan worth enough to cover the cost of attending a public university. Unfortunately, you cannot predict whether your baby will attend a public or private university or if your child will receive scholarships, all of which will affect how much college will cost. A college savings calculator will help give you a basic idea of how much to save for a typical college education for your child. Aim high. It is better to have more money saved than not enough.
As you adjust to paying for diapers, baby clothes and other baby supplies, it may be hard to find money to save for college. Look for ways to cut your spending and put whatever extra money you can find toward your baby's college fund. Buy used baby clothes and toys or purchase a cheaper brand of diapers to free up more money for the college fund. Some credit cards and programs such as Upromise or BabyMint help you save by contributing a percentage of everyday purchases to your child's college fund.
529 plans encourage saving for college by offering tax incentives. You may purchase a prepaid tuition plan or a college savings plan, both of which are sponsored by states or educational institutions. A prepaid tuition plan allows you to buy college credits at the current tuition rate. Those credits may be used at select colleges and universities in the state and their monetary value may be applied to tuition at other schools. A college savings plan allows you to contribute money to help pay for tuition and other college expenses. That money is invested in mutual funds, money market funds or other investment avenues to help it grow. While there are limits on where you can use money from a prepaid tuition plan, funds in a college savings plan can generally be applied to any accredited college or university. Depending on the plan and whether you buy it directly from the plan's sponsor or through a broker, there might be fees or expenses.
IRAs and ESAs
IRAs (individual retirement accounts) and ESAs (Coverdell Educational Savings Accounts) are two ways to safely save for college. While IRAs are typically used for retirement, their funds may also be used for higher education expenses. Contributions to traditional IRAs may be tax-deductible and interest is tax-deferred. Roth IRA contributions are not tax-deductible, but interest is tax-deferred and the money is withdrawn tax-free. ESAs are designed to pay for educational expenses at all levels and money may also be withdrawn tax-free. Savings in all three types of accounts are not taken into consideration in financial aid decisions.
A custodial account is a savings account that you open in your child's name. The money in the account grows like a traditional account and you may add to the account as much or as little as you like. Other family members and friends may also add to the account. Custodial accounts are taxed each year and when money is withdrawn from the account. Once your child reaches the specified age, the money may be used however he pleases, which means that it doesn't necessarily have to go toward college expenses.
Grandparents and other family members can help you save for college. For your child's birthday, request contributions to a college fund instead of gifts. The child's grandparents may consider a 529 plan for the child to take advantage of the tax incentives it provides. Aunts and uncles without children of their own may open a Upromise or BabyMint account and add to your child's college fund as they make purchases of their own.
Stacy Zeiger began writing in 2000 for "Suburban News Publication" in Ohio and has expanded to teaching writing as an eighth grade English teacher. Zeiger completed creative writing course work at Miami University and holds a B.A. in English and a M.Ed. in secondary education from Ohio State.