If you’ve already started saving for college, congratulations – any start is a good one. However, as you proceed with your efforts, you’ll want to take steps to ensure that you’re saving the right way – with efficiency and a clear focus on your college goals.
Here are some questions to keep in mind:
Am I saving enough? Most of the parents who participated in our “College Within Reach” poll are strongly committed to saving for college, but many should be saving more. More than six of 10 families have saved less than $10,000, and 43% have saved less than $5,000. Parents with older children – those closest to college, age 15 to 18 -- are not necessarily more likely to be stronger savers; about four of 10 of these families have saved less than $5,000.
As our article “Concerned About the Cost?” points out, good college options can be found at many price points. So the amounts that some of the families in our survey are saving may be well matched with the colleges they have in mind.
But here’s the point: You need to take a reality check from time to time. Compare your savings level with the likely cost of the colleges you’re considering. If it looks like there’ll be a gap between cost and resources, start examining your loan and financial aid options very closely – in addition to considering whether there are ways you can just save a little more.
Am I taking advantage of all my funding options? When it comes to saving for college, it helps to be resourceful. In our article “Lots of Ways to Get Started,” we discuss some of these creative approaches – like asking grandparents and other relatives to make contributions to a college saving account in lieu of other gifts, and taking a look at the growing range of credit card options that make a contribution to a college fund when you charge purchases to the card. Several relatively small streams of savings like these, in combination, can nicely supplement your other saving efforts.
Am I taking taxes into account? As with any kind of saving and investment program, it pays to consider the impact of taxes on your college savings, and look for savings options that offer tax advantages. Numerous studies have demonstrated that taxes can really eat into investment return over time, and have a considerable impact on overall account value.
A qualified professional, such as an accountant, will always be the best source of expert tax guidance.
However, it’s also important to know that college savings programs such as 529 plans and Coverdell accounts offer certain tax advantages. Earnings in both 529 and Coverdell accounts accumulate on a tax deferred basis until the assets are withdrawn. When the proceeds are used to pay qualified educational expenses – like tuition, room and board, fees and book bills, to name a few of the eligible costs – then the withdrawal is free from federal income taxes. The investment provisions of 529s and Coverdells vary, so it’s important to understand their specific features before making a choice.
Paying attention to taxes can pay off – particularly when programs like 529s and Coverdells have been designed precisely to help college savers maximize their investment potential. Don’t fail to check out these tax friendly approaches.