How to save for college
Chris and Mike Roe
|The Roes have two college-bound teenagers but haven't started saving.|
|Open 529 plans for each child and fund them aggressively.|| |
| The plan in 4 steps|
| Determine how much money you'll need.|
|Total tuition, fees, room and board and other miscellaneous expenses for all four years.|
|Estimate what your expected family contribution will be.|
|Fill out FAFSA.|
|Use these to calculate college expenses.|
| The plan|
Start saving now! If the Roes want to be able to help pay for college without dipping into their savings or having to refinance their properties, they will need to start a disciplined savings plan immediately.
We have estimated that a contribution of around $400 per month will be needed to save the money that they need for college. This will be a stretch in their budget, but the Roes indicated that this is a priority item and they will make the needed effort to save this money. What we are looking for is a simple, effective way to save these funds.
Pick right savings vehicle
Now that they know the amount, they need to pick the appropriate vehicle. For their purposes they can choose between amassing personal assets, a Coverdell education savings account, U.S. savings bonds or a 529 plan. While Coverdells are good, the contribution is limited to $2,000 per year per student -- not quite enough to reach their goal. They could combine this with an investment in U.S. savings bonds, whose earnings are federally tax-free if used to pay for higher education. Or they could put the money in a 529 plan.
Keys to success
|Make saving for college the priority for a few years.|
|Don't underestimate how much money you'll need.|
|Establish the savings plan and stick with it.|
|For short-term savings, choose a less-risky investment. Longer-term savings plans can take more risk.|
|Take advantage of state income tax deduction for 529 plans.|
|Know that any money not spent on education can go toward retirement savings.|