By: Guest Blogger Marcos Cordero, GradSave CEO
As a parent, your child’s future education is one of the most important things to you, and the exponential cost of college is a sobering reality that should be planned for sooner rather than later. While there are many ways to save for college, a 529 savings plan is an optimal choice for most parents.
529 college savings plans have several distinct and almost unbeatable advantages over other investment vehicles (like bonds, savings accounts, insurance, etc.), but their primary benefit is that your interest grows tax free and distributions are tax free as long as they are used for college related expenses. In addition, some states think of it as a 401(k) or IRA for your children. We all know about the power of compounded, tax-free interest.
It can be a bit of a confusing landscape, however, as there are over 97 plans nationwide, and the best choice depends on the state in which you reside and pay taxes. For some states like Texas and Florida, which have no state income tax, you have more flexibility to choose any 529 plan nationwide, regardless of where your child goes to college. When shopping for a plan, remember to look at the fees that each plan charges, as that may affect the overall return you can receive throughout the life of your investment. Using a loaded fund with fees (no-load funds have minimal fees) may adversely affect your return. A caveat: there are instances that a loaded fund may make sense, specifically if your financial advisor is helping you make investment decisions.
Another great feature of a 529 plan is that anyone can contribute, including friends and family. And with sites like GradSave, an online college savings registry, parents can connect easily via Facebook, e-mail, Twitter, etc. with their friends and family for them to also make contributions that go directly to the savings plan. Friends and family love being able to simply donate to a child’s college savings in such a creative way, instead of another set of clothes for birthdays and holidays, which will likely be tossed aside after a few years. Research by Sallie Mae shows that 18% of college contributions come from friends and family, and sites like GradSave make a huge difference in aggregating college savings with little effort.
To help jumpstart your college savings plan, GradSave has just launched the $1,000 Savings Challenge and will literally be giving away money for college tuition in the form of gift cards. The first ten families to reach their savings goal of $1,000 will each win $100 in college savings gift cards – you can’t beat that!
So, now that you know the best ways to save, you are probably wondering how much you need to save on a monthly basis to reach you target goals? This largely depends on your income and if your target university is public or private.
Here’s a graph provided by The New York Times to simplify the monthly break down:
After taking a look at the above graph, it’s easy to see the amount of monthly savings you need to set aside in order to reach your long-term goals, and these are simply estimates to help your child (and you!) afford college.
Once you have chosen a state 529 plan and evaluated what your monthly savings goals are, you, along with the help of your friends and family, are on the fast track to giving your child the unparalleled gift of education!
Image Credit: Tax Credits