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Start Saving Early for College

It’s a hard (and frustrating) fact: higher education is extremely expensive.  Indeed, the cost of attending a college or university has grown exponentially over the years and the vast majority of families cannot afford to pay entire tuition bills out of pocket.  Although these hefty price tags might cause your heart to skip a beat and question the feasibility of sending your child to college, with enough planning and foresight higher education can be financially viable.  You simply need to start prepping early!

When it comes to saving for college, you want to use time to your advantage.  In other words, the earlier you begin, the better positioned your family will be.  As you well know, the money you set aside will accrue interest.  If you begin saving when your child is quite young, you’ll have managed to earn a hefty sum from the interest alone.  For example, say you start making a monthly contribution of $150 to a college account when your son or daughter is born.  If you manage to secure 6% interest over the course of 17 years, a whopping 42.5% of your total savings will have come from interest.  Not too shabby right?

Additionally, it’s also important to note that you should set aside whatever you and your family deem doable.  It doesn’t matter if you can only save $500 a week or $50 a month, every dollar counts.  And, of course, you can even set up an automatic transfer from your checking account into a savings account.  This ensures the process is hassle free and not forgotten!

If you’re unsure of how to begin, here are a few methods and means specifically created for families saving for college:

529 Basic College Savings Plan: The 529 Plan is a savings account which allows you to invest your money and then withdraw funds free of federal income taxes.  The catch, of course, is that the money you withdraw must be used for qualified college expenses.  If the money is put towards other expenditures, it will be subject to taxes as well as a 10% penalty.

529 Prepaid Tuition Plan: The 529 Prepaid Plan allows you to set aside money for college while guaranteeing current tuition fees.  This plan can only be used in conjunction with participating schools.  You can choose from two options: state plans for state schools or an independent 529 for private colleges.  Only a handful of states currently offer a prepaid plan and some programs are unfortunately running into funding issues.  Therefore, we suggest you do a little research and ensure your state’s fund is healthy before investing.  Finally, if your child ultimately does not attend a participating school, you will be able to get your principal back.  However, it will not have been privy to a good interest rate and you might be hit with a few penalties.

Uniform Gift to Minors Act (UGMA): The Uniform Gift to Minors Act declares that a child may own securities (or other investments) in his name as long as a parent acts as a custodian of the account (until said child reaches legal age).  You can open a UGMA account for your child at any financial institution.  Unfortunately, if your child’s unearned income is higher than $1,900 he will be taxed at your income bracket until either age 19 or 24 (if he’s a student).  Finally, you will lose control over the account/money once your child reaches legal age.

Uniform Transfer to Minors Act: This is very similar to the Uniform Gift to Minors Act. If you’re still wary, consider the fact that the more you save now the less you’ll have to take out in loans when it’s actually time for your child to enroll in college.  Further, it’s critical to remember that though interest works to your advantage with regards to savings accounts, it works to your disadvantage when it comes to loans.  And, eventually, you’ll end up owing far more than the initial figure.  

Finally, we cannot stress enough that it’s never too late to start saving.  Even if you’re the parent of a high school junior or senior, money you begin putting away now is money you won’t have to borrow later.  And that’s certainly a fact you can take to the bank!


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