College Savings Plans
By Ray Andree
Printed in Practical Homeschooling #73, 2006.
Saving for college has less to do about money than you may think. Sure, every parent worries about whether they'll be able to afford to send their kids to college. But, dreaming about having loads of cash on hand when deciding which Ivy League college to send the little tykes is pulling the cart before the horse.
The majority of us, however, need a common sense approach to making prudent choices today so we'll be in the best position to help our kids whatever comes their way! To get started, think practical and follow the recipe below.
Read Early, Read Often
First and foremost, the best way to save college is to help your kids be good learners. No financial planner needed here! Just good ol' fashioned reading, writing, and arithmetic.
Being involved in your children's education and striving to make learning inviting and fun is behavioral training we should do as parents anyhow. Why? Because personal finance is mostly about our behavior and the necessary discipline we bring to bear on spending, saving, and making a living.
Start by reading to your kids as early as possible, meaning everyday. If they're a little older, give them opportunities to power their brain with fun, thought-provoking activities or projects. Make learning prominent, and the college choices will be too numerous to count.
Save Early, Save Often
Next, develop the habit of saving in your kids by becoming a better saver yourself. Teaching kids the right way to do something takes time and patience, and leading by example rewards you as much as them.
As early as six months old, get a piggy bank and have your child save your spare change at bedtime - right after you read to them! Making it part of their bedtime ritual guarantees saving will be done every day, and you'll be thinking about it every day, too. You'll also be putting a little money aside early and often.
Get Those Savings Accounts Open
After buttoning down the "save early, save often routine," you'll need a place to stash your nest egg. We list five types of savings accounts you could end up opening in their order of importance. There are more, but these will give you a real good start.
Passbook Savings Account. This is the old-fashioned jewel of any college savings program. The interest you earn isn't much to brag about, but that's not the point. This is a place to temporarily park the daily bedtime savings in order to fund other college savings investments. And, this is a powerful tool to get your kids - and yourself - into a savings routine by making regular trips to deposit the kids' hoard of cash. They can count up the change beforehand, and afterward, all of you can admire how it's piling up!
Rebate College Savings Plan. If you spend money, you'll want one of these. They really make saving for college effortless. Basically, you're rebated a portion of your purchase each time you spend money at a participating merchant. The leading companies that offer this sort of savings plan are Upromise (www.Upromise.com), BabyMint (www.babymint.com), and LittleGrad (www.littlegrad.com).
Education Savings Account (ESA). Also known as Coverdell ESA, this allows you to save money over time without paying taxes on the investment gains, just as long as the money pays for your kids' education. ESA investment options are extensive and allow for more aggressive styles of investing should college still be a long way off. You can set these up through mutual funds, banks, or brokerages. Also, they can be funded for the previous year right up until you file your taxes in April.
529 Savings Plan. These are state-sponsored, simple to set up and manage, and you won't have to pay federal income taxes on your investment gains. More than half of the states also allow a state-tax deduction for all or some of the money you put in, and many don't tax your gains, either. Try an automatic savings plan and the habit of regularly saving is done without you having to think about it. To compare features of your state's plan with what's offered by other states, check out collegesavings.org or savingforcollege.com.
529 Prepaid Tuition Plan. These allow you to prepay your kids' college tuition at today's lower rates, not the higher ones we're all worried about down the road. For a listing of 529 Prepaid Tuition Plans, visit www.highereducation.org. There is also a national plan for private colleges called the Independent 529 Plan at www.independent529plan.org.
Rely on Financial Aid
This all leads to the fourth part to a practical college savings plan: plan on using financial aid! And, start as soon as the kids get into high school. We're not just talking grants, loans, and scholarships, but also work study, loan forgiveness opportunities, and service payback programs.
This is as good a place as any to confront your biggest worry: how much will college cost? Answer: it doesn't matter. That's right: don't worry, be happy. There are too many variables, and besides, trying to predict this only masks the real issue: are you doing what you can now to plan, save, and pay for your kids to get a college degree?
The good news is that the closer you get to your child going off to school, the clearer the cost picture becomes. Just don't worry yourself sick for the next 15 years wondering how you're going to afford it all. Rely on financial aid as an important part of funding your children's college education. Be sure to start early and be aggressive!
Enjoy the graduation!
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