If you’ve spent years putting off college savings, and then putting it off some more, it’s time to stop passing the buck. Consider these figures: the average four-year private college now costs $26,273 annually, according to The College Board. And public colleges aren’t exactly cheap, at an average of $7,020 per year.
No wonder students these days graduate with an average of $23,000 in debt. The good news: if you’re proactive about saving, and diligently put money aside before the tuition bills start to pile up, you’ll have much less of a debt mountain to pay down once you graduate.
You have to save smart, though, whether it’s for yourself or for your toddler. A few strategies to help you get where you need to be:
1. The 529 plan is your best friend. The nation’s pre-eminent college-savings vehicle, the so-called 529 plan lets your savings grow tax-free in the investment vehicle of your choice. Most states offer some kind of tax credit or deduction for investing in your own state’s plan, which means it makes financial sense to keep investing even when you’re close (or at) college age; it almost acts as a discount on your tuition bill. New York, for instance, offers a state tax deduction of up to $10,000 a year, while Illinois grants up to $20,000.
Beyond just tax deductions, though, do your due diligence and research which state plans are most attractive in terms of lower fees, multiple fund options and past performance. Investment research sites like Morningstar evaluate the 529 plans of all 50 states.
2. Don’t forget the Coverdell. The Coverdell Educational Savings Account is an account which lets you contribute up to $2,000 a year, with the money growing tax-deferred and withdrawn tax-free for qualified educational expenses. Previously known as Education IRAs, the Coverdell is no longer considered an IRA. Coverdell accounts essentially are trusts created for the sole purpose of paying the education expenses for the designated beneficiary. Of course, there are always rules and restrictions, so check out more details at the FinAid site.
3. Dollar-cost average. That’s a fancy way of saying you need to save regularly over time. “Pay yourself first,” as personal finance expert David Bach likes to say, by automating withdrawals from your account and earmarking it for savings or investments. If you don’t do that, then it’s human nature that you’ll spend whatever is there and not save anything at all. Regular, fixed investments can help to insulate you from wild market swings, by buying more of an investment when the market is cheap, and less when it’s pricey.
4. Look into prepaid tuition plans. Some states offer a juicy perk for saving: start investing now, and you can lock in today’s tuition rates. With inflation rates for private four-year colleges ramping up at 4.4 percent last year alone, it can be a handy way to give yourself some peace of mind. You won’t gain or lose from big market swings, as you would with an all-equity fund, but at least you’ll know college won’t cost any more than it does right now.
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