It seems like only yesterday they were in diapers, but won’t be long until your kids are off to college. No matter how old they are, the time to start saving for college is now. That’s because, thanks to the magic of compound interest, the earlier you begin saving, the further those savings will go by the time your child is ready to head off to college. Here are some tips from Hall Honda on how to get started.
How Much to Save?
Because tuition costs are always on the rise, it can be difficult to predict how much much it will cost in five years, let alone 18. And don't forget that estimates will vary wildly depending on whether you want to save enough for a state institution, a private Ivy League school, or something in between. In addition, your family’s own income level will help determine the amount you will be required to pony up, versus the amount that might be covered by financial aid. Ideally, you should begin by reviewing your finances with a non-biased financial adviser who can help you decide upon a monthly contribution that fits comfortably within your budget and helps you reach your college savings goals.
Parental Assets vs Student Assets
According to Bankrate.com, federal aid agencies treat a student’s personal assets differently than parental assets when calculating the need for financial assistance. For example, if parents have accrued $100,000 in their name, they would be expected to contribute $6,000 toward college expenses. A student with the same amount of money, however, would be expected to contribute $20,000 toward college expenses. The following savings plans are considered to be the property of the students when distributed, but the positives far outweigh the negatives in regards to a potential reduction in financial aid, especially when you consider that most aid comes in the form of a loan and must eventually be repaid.
29 Savings Plan
Each state has its own 529 plan, but you can choose any state’s plan, regardless of your residence. Unlike a Coverdell, you can make unlimited contributions to a 529 plan. Once deposited, money in a 529 plan grows tax-free and withdrawals are tax-free as long as they are used for qualifying educational expenses. Look for plans that allow flexible investment options. If you withdraw money from a 529 plan and do not use it for educational expenses, the earnings will be taxed and you’ll be forced to pay an additional 10% penalty.
UTMA or UGMA Custodial Trust Plan
Although not geared specifically toward educational expenses, a custodial trust (such as a UTMA or UGMA plan) does not have to be used for educational expenses. A custodian controls the assets until the beneficiary turns 21 for a UTMA (Uniform Transfers to Minors Act) and 18 for a UGMA (Uniform Gift to Minors Act). At that time, the recipient of the account can use the money however he or she wishes. Because assets in an UTMA or UGMA are considered property of the child, it is taxed at his or her tax rate, which is usually (hopefully) much less than the contributor’s own tax rate.
Regardless of what type of account you choose to open, the key to success is to start early and save consistently.