A college education can pay off-many college graduates see increased lifetime earnings and a greater variety of life choices. But college is expensive. According to the College Board, for the 2018-2019 academic year, a realistic budget for a year at a out of state public school is $37,400, $21,370 for in state public school, and 48,510 for private colleges. What can you do to afford it? Here are some basic steps to make saving for college a little less stressful.
1
Do the math. The dollar amounts involved in a college education may seem daunting at first, so break them down. How many years do you have to save before your child begins college? Do you have Ivy League hopes, or would you be happy if your child went to a state school? These considerations can put your savings strategy on firmer footing and help you find the best way to save for college.
2
Start early. Given the costs, you may want to start saving for college before your child is born. And though there are other big expenses that come with a child, don’t be afraid to start small. There are high yield savings accounts and money market accounts that have no minimum deposit requirements. If you put $2 a day into a kid’s savings account—that’s less than the average price of a cup of coffee—for the first 17 years of your child’s life, you’d save around $12,400, plus interest.
3
Get your family involved. Many relatives shower kids with gifts. But if your child already has the basics covered, consider asking doting grandparents, aunts and uncles to donate to a college savings plan for baby in place of birthday and holiday gifts. Don’t worry about appearing ungrateful or pushy. Your child’s education is more important than a video game.
4
Invest in a 529 plan. College savings 529 plans are tax-advantaged education savings accounts. The money earned in 529 accounts is not taxed when used to pay for college or for private school at other levels. Plus, many states allow a tax deduction or credit for 529 contributions—some as high as $10,000. Some states’ 529 plans take bigger service charges or commissions than others. So examine the lowest fees and biggest state-tax breaks to find the best 529 plan for you, and maximize your earnings.
5
Use your IRA. In many cases, you can withdraw your contributions to a Roth IRA (individual retirement account) prior to retirement without a penalty. That makes it a good place to save money for your child’s college fund when you’re not sure how much you’ll need. In a 529 plan, if your child decides against higher education—or gets a full scholarship to the school of their choice—you’ll have to pay taxes on the money that’s been earned in the account, and possibly a penalty, to take the money out.
With these basics in hand, you can start the process of building the best college savings plan—one that works for your budget and the dreams of your children.
This chart is a state-by-state breakdown of the 14 most generous states in terms of 529 tax credits go. Here is the list in alphabetical order, with the state followed by the benefit. Alabama allows deductions of $5,000 per parent or $10,000 if filing jointly. Arkansas allows deductions of $5,000 per parent or $10,000 if filing jointly. Colorado allows deductions of the full amount of the contribution. Connecticut allows deductions of $5,000 per parent or $10,000 if filing jointly, and a five-year carry-forward on excess contributions. Illinois allows deductions of $10,000 per parent or $20,000 if filing jointly, and that's per beneficiary. Indiana allows a 20% tax credit on contributions up to $5,000 with a $1,000 maximum credit. Michigan allows deductions of $5,000 per parent or $10,000 if filing jointly, and above-the-line exclusion from income. Mississippi allows deductions of $10,000 per parent or $20,000 if filing jointly, and above-the-line exclusion from income. Missouri allows deductions of $8,000 per parent or $16,000 if filing jointly, and above-the-line exclusion from income. Nebraska allows deductions of $10,000 per tax return, or $5,000 if filing separately, and above-the-line exclusion from income. New York allows deductions of $5,000 per parent or $10,000 if filing jointly, and above-the-line exclusion from income. North Dakota allows deductions of $5,000 per parent or $10,000 if filing jointly. Oklahoma allows deductions of $10,000 if single and $20,000 if filing jointly. That's per beneficiary, and an above-the-line exclusion from income, with five-year carry-forward of excess contributions. Pennsylvania allows deductions of $14,000 per contributor, or $28,000 if filing jointly. That's per beneficiary and with any state plan.
Seth Kaufman is a journalist and ghostwriter based in Brooklyn. His work has appeared in the New York Times, The New Yorker online and many other publications.
Learn how to talk to your college-bound kid about the true cost of their dream school.