I, like all other new parents, are a little overwhelmed when thinking of saving for college. Where do you start? What ways do I get the most interest? What are the benefits to certain programs? There are tax breaks out there too? Or maybe your kids are around the age of 9 or 10 and you’re halfway to the college milestone. You have been saving this whole time but haven’t looked at other options that may give you better benefits. Keep in mind the rule of 6% inflation each year. Here are your options when it comes to saving for college:
Number one recommendation for long-term savings: 529 Plans.
Each state has one, and you can shop around not having to reside in the state that holds your plan. Each state has a different plan, so you can pick one that has benefits you are more likely to use. The account owner can request withdrawal at anytime (subject to tax and a 10% penalty on earnings). 529’s also allow for third parties, such as grandparents to directly contribute. Many rewards programs are out there that give you free money based on your expenditures, and deposit that directly into your 529 Plan. Check out rewards such as Upromise, Futuretrust, and Fidelity 529 Rewards American Express Card which gives you 2% rebate on your purchases. Also note that 529 Plans are tax deferred.
Traditional Savings Accounts
Shop around, interest rates have dropped dramatically the past couple years. Often a savings account interest does not keep up with inflation. The upside is always having access to your cash.
Often times they earn more interest rate than a traditional savings account and have little to no risk as a savings. You just have to commit your money for so many years. Word of warning: be careful that taxes don’t eat up your interest rate in the end.
Best payout for interest if you are starting savings early, but many experts recommend switching to a less aggressive plan in the couple years approaching the college milestone. Cash out stocks and put them into bonds or a 529.
The U.S. Treasury recently announced new interest rates, and don’t forget that they compound yearly. For the Series I (one year commitment, renews automatically each year, collecting compound interest) interest is at 1.74%, and the Series EE is earning 1.44% (18 year commitment).
Mutual Funds (including money markets, stocks, bonds)
These are different than individual stocks, a portfolio of an assortment of bonds is put together to take advantage of the overall stock market with lower risk. However, your principal is not insured. Assets should be moved out of mutual funds and into a safer route when the time comes close to having to put that money to work paying for college.
Are you saving for college with a 529 or using something else? Share your choice with our readers.
The bottom line is to start saving early, with an aggressive plan. There is more risk, but also can be more gain. During your students’ high school career, switch your funds out of risky accounts and put them somewhere your money principal is guaranteed (savings, CD’s, 529 Plan). Consult a financial advisor to best advise you.
Did you know FreshmanFund.com can help you save more for college? Every dollar counts!