There are many ways to financially prepare for your children’s college education, but the sooner you start saving, the better.
Even modest savings can pack a punch if you give them enough time to grow. Investing just $100 a month for 18 years will yield $48,000, assuming an 8 percent average annual return. You can find out how much money you can start saving by creating a budget.
Consider 529 plans, named after section 529 of the Internal Revenue Code, which are investment accounts operated by state or educational institutions and are designed to help families set aside funds for future college costs. You can deposit as much money as you want each year. The account grows based on market returns. New York State has its own 529 College Savings Program.
529 plans are usually categorized as either prepaid or savings plans.
- Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Independent 529 Plan is a separate prepaid plan for private colleges.
Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select.
Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far).
The Coverdell Education Savings Account (ESA) is also an investment account where the assets are used for college expenses. You can usually set an account up at almost any brokerage firm or financial institution. It is similar to the 529 College Savings Plan in that it has investment options where you decide what to buy and sell in order for your account to grow.
Grants and loans
Don't leave any stone unturned when looking for college education financing. Federal, state, and private grants and loans can bridge the gap between your savings and tuition bills, even if you think you make too much to qualify. Of critical importance is completing the applications for Free Application for Federal Student Aid, or FAFSA, to determine your eligibility for federal and state grants and work study.
Only borrow federal loans after you've explored and taken every opportunity to use grants and scholarships. Federal student and parent loans have low, fixed interest rates and flexible repayment plans if you face hardship. Stafford, Perkins and PLUS loans are the three types of federal loans.
When completing your tax return, you may be eligible to take two federal tax credits - the Hope Credit and Lifetime Learning Credit - in the years you pay tuition.