Statistics from the Census Bureau reveal that college tuition is increasing at a rate of 8% per year. Few families have enough income to cover the cost of tuition completely out of pocket, so some costs will have to come from elsewhere – loans, scholarships, or savings. Loans can be expensive and scholarships aren’t guaranteed. Many times, saving for college is the best option.
Though it might be more difficult, saving for college is much cheaper than borrowing. In fact, saving is free. You earn interest on the money you save versus paying interest on the money you borrow. If you manage to save $150 a month at 6%, you’d have nearly $25,000 after 10 years. Increase your monthly savings to $250 and you’d have close to $50,000 after 10 years.
Best Tip: Start Saving Early
If you want to save for college, starting early is key. The earlier you start saving, the less pressure you have on your budget and the more money you could put toward a college education for yourself or your child.
To know how much to save, you should know how much the total college education will cost. You can use a college cost calculator like the one from CollegeBoard.com to estimate the amount college will cost by the time you’re ready to attend. Once you have an estimate of the college cost, use that to set a savings goal. That way you have a concrete number to work toward. You’ll be able to track your progress toward the goal and adjust your monthly savings if necessary.
As with other major financial goals, it helps to have a budget that will allow you to see how much you’re able to contribute toward college. Subtract your total monthly expenses from your monthly income to see what’s left over after all the bills have been paid. Base your monthly college savings on that amount. Review your budget every once in awhile to find opportunities to cut back on expenses that will allow you to contribute more money to college savings.
Contribute to a College Fund
You can fund a college education by putting money into a 529 savings plan or a college fund. It’s similar to a 401k, except you place post-tax fund into the account. Interest earnings aren’t taxable as long as you use them for education-related expenses like tuition, room, board, etc. You can also fund a 529 prepaid plan that lets you prepay the cost of a student attending an in-state public college.
While a 529 savings plan can be used to send a student to any school in the United States, a 529 prepaid plan is intended to pay tuition for an in-state public school. You can convert a prepaid plan to a private or out-of-state school, but you may lose some of the money you saved.
College funds differ by state. You can visit www.savingforcollege.com to find information about the college fund in your state. Since many plans don’t have state restrictions, you can open a 529 plan in a state other than where you live if you see a benefit to doing so.
College Savings Through Reward Credit Cards
Some credit cards have reward programs that place money into a college savings account based on the amount of purchases you make. Keep in mind that finance charges and other fees could negate the savings you receive, so use your card in a way that minimizes the cost.
Fidelity 529 College Rewards American Express. The card has no annual fee and no limit on cash rewards. You earn 2% on purchases that can be deposited into a Fidelity 529 account. Other family members with the credit card can link their rewards into the child’s 529 account. If you spend $12,000 a year, you can earn $240 in cash rewards.
The BabyMint Platinum Visa Credit Card gives you 1% college fund rebate for most purchases and up to 26% rebate when you make purchases through BabyMint.com. There’s no annual fee and a decent 10.99% APR for the most creditworthy applicants.
Tips for Saving the Max
When you contribute money to a college fund or separate savings account dedicated for college, the key is to save as much as you can to ensure you reach the goal. Here are some ways to make it happen.
The more money you’re able to sock away toward your college education, the less money you have to borrow. The hardest part about saving money is actually getting into the habit of putting the money away on a regular basis. If you find it painful to save money, try making it automatic to your savings account. Use payroll deduction or set up an automatic bank transfer to have the money automatically transferred into your college savings account on a regular basis.
If your income increases, increase your college savings, too. This will help you reach your goal quicker. Or, if the cost of education inflates beyond what you expected, you’ll have the extra money to help cover the expense.
Save windfalls and extra money. If you receive a lump sum of money, like a tax refund or inheritance, put some (or all) of the money toward college savings. Whenever you have a regular monthly payment that stops, like a paid off credit card, start directing that money into the college fund.
Ask grandparents to contribute. Every year, grandparents spend hundreds of dollars on clothes, toys, and electronics that kids won’t be interested in in a few months. Ask them to instead start putting some money toward college savings.
Even if you’re only able to save a fraction of the cost of college expenses, it’s better than nothing. That’s less money you’ll have to borrow.
This, of course, is just the beginning. Saving for college is just like learning how to save money for anything else. To learn more about college and your financial planning, read the rest of our college planning articles.
Read More:
- How to Start an Emergency Fund
- How to Avoid Credit Card Debt
- How to Save Money Automatically
- How to Get a Loan for College
- Seven Ways To Save Money During a Recession
