Ahhh, college. The excitement, the social life, the feeling of stretching your brain…and your wallet. Yikes! Whether you’re saving for yourself (it’s never too late – my mom started a Master’s degree when she was in her 60s) or for somebody else, there are a few things you should know.
College is expensive. No – really expensive, and getting more expensive every year! Did you know that private colleges now run as much as $35,000 per year? That means a four year education can cost as much as a house. (I guess it’s like a taking out a mortgage on your brain.) So the sooner you start saving, the better. Make sure you are sitting down, then check out this nifty calculator to figure out how much you’ll need: http://www.savingforcollege.com/college-savings-calculator/index.php.
Saving for anything takes perseverance and patience. The world is full of temptations, so when you start saving for college, make sure you separate that savings from other accounts so you aren’t tempted to dip into it (not even once!) before you need it.
So – where can you put aside money for education? You have several options, including:
- a regular savings account
- an education IRA
- U.S. Savings Bonds
- a custodial account under the Uniform Transfers to Minors Act
- a state-run 529 plan
A “529 plan” is a special state-run investment program specifically for educational savings that is currently available in 41 states. Here’s how it works:
- your money is invested in either a prepaid tuition plan (which is a contract that promises to pay for at least part of the future tuition costs) or a college savings plan (which is a mix of stock and bond mutual funds)
- your investment grows tax-free until it is withdrawn
- withdrawals are taxed to the student (who is usually in a lower income bracket – cha-ching!)
- the allowable contribution is $100,000+ for each beneficiary regardless of age or income
- you cannot use a 529 plan and an education IRA for the same child – but the 529 plan lets you save a lot more and gives you better flexibility so you really don’t need both
If you are saving for a child, you’re probably thinking: Great, Gabby. But how am I supposed to know where this little bundle of joy is going to go to school? What if it’s in another state?
Well – here’s what else is cool about a 529 plan. No matter what state you are in, your account can be used to pay for any accredited college in the country. Maybe even for graduate school! You also have the option to invest in a 529 plan outside of the state you live in. There are about two dozen states that make their plans available to anybody, and you can even have 529 plans in more than one state. Before you decide, make sure you check out any in-state incentives you might be eligible for.