6 Personal Finance Tips to Help Save for College

Sallie Mae's How America Saves for College 2013 study found that only about one-third of parents have a plan to pay for their children's college, although nearly all parents believe college is a sound investment in their children's future.

Everyone knows how expensive college is and how much more quickly tuition has increased compared to general inflation. When the study asked parents to describe how they felt about saving for college, top adjectives used included "overwhelmed," "annoyed," "frustrated," and "scared."

While the average family intends to save nearly $40,000 for college, they typically only save about half that, according to the study. Here are 6 personal finance tips that can help you save for your children's college education.

1. Take Care of More Important Things First

You need to save for your own retirement because there are far more options for paying for college than for paying for retirement. Also, pay off your own student loans, and pay off high interest debt like credit cards. Build up your emergency fund to hold three to six months' of living expenses. Once you have these things nailed down, it's time to start saving for college.

2. Consider a 529 Plan and Alternatives

The Sallie Mae study referenced above found that around 27% of parents choose to save for their kids' college with 529 college savings plans. They're tax deductible in 34 states. You can arrange for contributions to be automatically deducted from your paycheck so you won't forget. When you experience minor windfalls like tax returns, work bonuses, or even scratch card winnings, consider putting half into the 529 plan. Alternatives to 529 plans include:

  • Coverdell Education Savings Accounts - whose earnings accumulate tax-free and aren't taxed at distribution as long as withdrawals don't exceed eligible education costs. But you can only contribute $2,000 per year.
  • US Treasury Savings Bonds - which earn lower interest, but whose security is guaranteed. Generally, accumulated interest is free from taxes when used for educational costs.
  • Custodial Accounts - are managed by a custodian until the child reaches 18 or 21 (depending on your state). Interest is taxed at the beneficiary's rate, and money in the account becomes the permanent property of the beneficiary once he or she reaches adulthood.
  • IRAs - which can help if you won't access your child's college money until after you're 59 ½. These often earn higher interest than 529s.

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3. Save Early and Often

Saving for college starting when your child is born is ideal, but start as soon as you can. Invest consistently, and once or twice a year increase the amount you contribute. Having money taken straight from your paycheck is the most painless way for most parents to regularly contribute to college savings. Automatically depositing money into savings, whether for retirement or college education, is one of the smartest personal finance moves a parent can make.

4. Raise Financially Literate Children

Even if you have the means to fully fund your children's 529 plans, you should involve them in the process when they're old enough. Having them contribute once they land their first part-time job is good too, even if it's only a token amount. It's good to get kids invested in important personal finance tasks like saving for college. If your children's high school doesn't offer basic finance classes, don't shirk the responsibility. Financial literacy pays off for every child as they reach adulthood.

5. Budget and Track Household Spending

The foundation for solid personal finance is a budget based on your life, and Mint is one of the easiest ways to create a budget. Not only can managing income and expenses with Mint help you avoid debt and forecast your financial future more accurately, it can help you track your investments, including educational and retirement accounts. At the very least, knowing how much you have coming in, and your obligations helps you estimate how much you'll have to come up with once kids enroll in higher education.

6. Understand That You're Doing the Right Thing

College is expensive, but it pays off. In fact, education has a greater impact on earnings over a 40-year career than any other demographic factor. Will you be able to save enough to cover all your kids' college costs? There's no way to be sure unless you're well-off financially. However much you save is money you won't have to borrow, and borrowing is always more expensive than saving. With the right personal finance plan, you can help your kids tremendously as they reach adulthood, maximizing the chances that they'll become and remain independent sooner.

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