Saving for College: Ways to Minimize the Sticker Shock
There's no doubt that a college education can be costly, but according to U.S. Census Bureau data, someone with a college degree can earn, on average, 60 percent more than a person with only a high school diploma. In our Fall 2010 issue, we looked at ways to borrow money for college. Now, as states tighten their belts and higher-education budgets are squeezed, we follow up with tips on saving for college.
Start planning and saving for college as early as possible. "Small, steady savings — ideally starting as soon as possible after a child is born — can help parents manage the sticker shock of a college education," said Luke W. Reynolds, Chief of the FDIC’s Community Outreach Section.
Estimate how much you need to save to meet college expenses. Several online calculators can help, including one from the U.S. Department of Education (go to www.studentaid.ed.gov and click on "College Savings Calculator").
Research your savings options. Some come with substantial tax benefits or other incentives. In each case, carefully consider the potential risks, costs and limitations before investing any money. Examples include:
Section 529 college savings plans. These programs, which are mostly offered by individual state governments, carry many of the same federal tax benefits as Roth Individual Retirement Accounts (IRAs).
There are two basic kinds of 529 plans: pre-paid tuition programs that allow savers to lock in today's prices for future tuition payments at designated universities, and traditional savings plans that allow families to contribute money into investments or FDIC-insured deposit accounts.
Under the FDIC's rules, in most cases, deposits that a 529-plan administrator places at a bank on behalf of different individuals are federally insured up to $250,000 for each participant.
U.S. Savings Bonds. "One of the great things about Savings Bonds is that parents can purchase them through regular, recurring deductions from their salary or a bank account," said Elna Johns, an FDIC financial educator. Savings bonds are backed by the government, but one tradeoff for the safety is a moderate rate of return. For qualifying taxpayers, the interest earned is exempt from state or local income tax, and the bonds may be exempt from federal income tax when they are used for education expenses. Learn more at www.treasurydirect.gov/indiv/indiv.htm.
Credit card rebates and incentives. Some programs allow parents to receive rebates and other incentives for purchases made with a credit card or for shopping at particular merchants, with the rewards deposited into a college savings account. Be careful, though, not to let these relatively small rewards induce you to make purchases outside of your budget. For guidance on how to maximize the benefits and minimize the problems with bank rewards programs in general, see Points, Cash Back and Other "Rewards" from Your Bank: How to Cash In on the Right Deal.
Special savings programs that may be offered in your area. For example, an increasing number of state and local government programs, often with assistance from nonprofit and philanthropic organizations, are providing incentives to help low-income families save for college. These initiatives typically involve grants or matching funds that go into a child's college savings account. "Children's savings accounts can be a way of encouraging early saving habits while accumulating needed financing for education," said Sherrie Rhine, a Senior Economist at the FDIC who specializes in consumer finance issues.