School's back in session. For many parents, this means another year closer to a child starting college. And another year closer to having to pay for that college education.
Wherever your children are in their educational paths, it's never too early—or too late—to save for college. These 5 tips can help you smartly save for higher education.
1. Start now. The cost of college remains within reach of many American families, especially those who start saving early. The College Board reports that half of all full-time public and private nonprofit four-year college students attend institutions charging tuition and fees of $10,281 or less. Small amounts of money, if invested early, can become sizable investments through compounding. For example, if you save $200 a month at a 6 percent annual rate of return for your newborn child, you will have more than $76,000 for college when she turns 18. Use FINRA's College Savings Calculator to see how early and regular saving can make your money grow. Already saving? Now is the time to consider adding a bit more to the educational savings pot.
2. Take advantage of tax advantages. Consider tax-advantaged savings options such as a 529 college savings plan. Every state and the District of Columbia offers at least one 529 plan, which allows money you earn to grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses. In addition, you may be able to take advantage of state tax benefits associated with a 529 plan.
3. Be mindful of investment risk. There is the risk with most college savings investment options that you may lose money or your investment may not grow enough to pay for college. For example, if you choose to invest in stock mutual funds, chances are that your invested funds' annual performance will mirror the trends of the stock market. You may lose money during a declining market. On the other hand, while savings accounts or U.S. savings bonds don't pose any risk to the principal you saved, the tradeoff is that they likely offer lower returns than investments such as stocks and bonds. Some college savings plans offer age-based fund portfolios that help manage risk. When the child is younger, the portfolio typically invests mostly in stock funds. As your child grows older, the asset allocation becomes increasingly conservative as it gradually shifts to bond funds and other fixed-income funds.
4. Factor in fees. Most college savings options have fees and expenses. A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in fees and expenses can translate into a large difference over time. If you are looking into 529 college savings plans or other savings options, FINRA has a useful calculator to help you analyze fees and expenses. If you invest in mutual funds through an Educational Savings Account (ESA) or custodial account, you should check the fee table in the prospectus to see how the costs of a mutual fund add up over time. If you invest in stocks or bonds, make sure you understand how much in commissions you must pay and factor this into any gain you may make.
5. Understand the limitations and restrictions of your college saving option. Most tax-advantaged college savings plans come with rules for how, and when, you can use the money that has been saved. For instance, there are income phase-outs for ESAs and educational savings bonds. Review carefully any college savings options you're considering to make sure they have the flexibility and control you feel you need.
FINRA provides an array of information to help you save for college.
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