Parents, if you want a reason to start hyperventilating, a recent report from Fox Business that suggests college will cost over $300,000 for babies born in 2014. According to author Kathryn Buschman Vasel, the Schwab Center for Financial Research has found that college costs have risen nearly 6% per year, “which suggests that in 18 years, the price tag for an in-state public university for four years will cost about $302,000. A private school will cost almost double at $592,000.”
Breathing into a paper bag yet?
Thankfully, just because college costs have risen so precipitously in the past does not mean that they will continue to do so. However, parents have taken the importance of saving for college to heart. According to a Fidelity Investments study, 85% of parents report saving for college as one of their top three savings priorities.
Of course, it’s not enough to plan on saving for college. The bigger question is where you will find the money to put into your child’s college savings account?
Here are five ways you can boost college savings without feeling the pinch:
Take advantage of the 529 plan
The best way to save for college is to set up a tax-advantaged college savings account—specifically a 529. While contributions that you make to these accounts are not deductible, the interest earned is tax-free, and withdrawals are federally tax-free as long as they are used for qualified higher education expenses.
Some specific caveats you’ll want to be aware of in order to take full advantage of the 529: Make sure that the parent or guardian is named as the account owner. When determining financial aid eligibility, 529 plans are considered to be the asset of the account owner, and such a large asset in the student’s name can negatively affect financial aid eligibility.
In addition, make sure you understand the tax advantages offered by various states for 529 plans. For instance, in my home state of Indiana, I can take a 20% tax credit on contributions up to $5,000 into my sons’ 529 college savings account. Find out here what (if any) 529 tax perks are available in your state.
Increase your contributions with tax dollars
Traditionally, Americans tend to use tax refund checks for splurges. After all, it is nice to spend a little something on yourself. What if this year, you put a portion of that refund away into your child’s college fund?
You can take it one further by adjusting your withholding so you get a smaller refund next year—and increase your take home pay. (The IRS offers a calculator to help you do just that.) Then, set up an automatic deposit of the extra money into your child’s 529. Right there, you’ve increased your savings without feeling the loss of a single penny.
Agree on a family saving percentage
Gifts of money are a wonderful way to both teach your children about budgeting and boost their college savings accounts. Sit down together as a family and determine what percentage of birthday money, checks from part-time jobs, and other money that comes your child’s way will go toward college. A good rule of thumb is about 10% to 20%, as that’s enough to help your child have a sense of ownership over their college savings, but not so much that they feel like they never get to spend their own money.
Roll over payments into savings
Is your child aging out of daycare and into public school? Now is a great time to start sending the amount that you had budgeted for daycare to your child’s 529. It’s a painless way to turn a regular expense into a savings boost. While this makes the most sense with child-related expenses (day care, after school care, babysitting, etc), you can do this sort of expense rollover with any regular payment that you will no longer have to make.
Ask family to get involved
Anyone can make a contribution to your 529 account, including grandparents, aunt, uncles, cousins, and family friends. So when a loved one asks you what to get Junior for his birthday or what Sis wants for Christmas this year, tell them you’d love for them to make a contribution to their college savings account. It’s a gift that will be meaningful long after the latest toy craze had started collecting dust in the basement.
The Bottom Line
The costs of college do seem to keep spiraling out of reach. But with some planning and some creativity, you can find money for your child’s college savings account without it feeling like a sacrifice.
