COLLEGE SAVINGS 101

Savingforcollege.com

5 habits of successful college savers
http://www.savingforcollege.com/articles/5-habits-of-successful-college-savers-853

Posted: 2015-10-07

by Kathryn Flynn

Americans collectively owe more than $1.2 trillion in student loan debt. Whatís more, according to data recently released by the Department of Educationís College Scorecard, many students with college degrees are earning less money per year than those with only a high school diploma, making it almost impossible to pay off their loans. So how can families prevent their children from making the wrong choices that can lead to excessive debt? Save for college in a 529 plan, of course! With tax-free earnings and tax-free withdrawals on qualified higher education expenses, for most families using a 529 plan is a no-brainer. But if you want to really maximize your savings potential thereís more to it than blindly socking money away. Here are six habits of truly successful college savers.

1. They save regularly

Most 529 plans offer automatic investment plans that link to your bank account, allowing you to ďset and forgetĒ regular monthly contributions. This method of paying yourself first has been proven to lead to disciplined savings and, in most cases, investment success. They key is to begin by contributing as much as you can afford each month, even if itís only a mere $25, and slowly increase the amount over time as your situation changes.

529 plans are professionally managed accounts, which means an experienced asset manager has designed the investment portfolio with specific goals in mind Ė so you donít have to. You simply select an investment option based on your goal and risk tolerance (e.g. conservative, aggressive), or choose an age-based option that will automatically adjust your investments as your child gets closer to college.

RELATED: 75% of college savers donít know how to invest their savings

2. They save with a goal in mind

While saving something is always better than saving nothing, families also need to make sure theyíre saving enough. To estimate future college costs, you can start by using Savingforcollege.comís College Savings Planner, or a similar calculator. This will give you can idea of what the sticker price of a school will be, based on current costs and taking inflation into consideration. You can also figure out how much youíll need to invest each month in a 529 plan to meet that goal.

Saving the total sticker price of your dream school might seem unattainable, but donít be discouraged. Students rarely pay full price for college after grants and scholarships are awarded. Find out how much the school typically gives out, and do some of your own research to find additional scholarships to close your savings gap. As the student gets closer to college, he or she may also want to consider a work-study program to help pay tuition.

3. They follow the rules

In order to take advantage of the tax-free earnings and tax-free withdrawals offered by a 529 plan, you have to spend the money on qualified higher education expenses. This includes tuition, fees, books supplies and other equipment required for course attendance and enrollment. Currently, computers and other technology purchased for college are not considered qualified unless the school requires them, but a bill (H.R. 529) passed the House earlier this year will change this rule if it becomes a law.

If you end up making a non-qualified purchase, youíll incur income tax as well as a 10% penalty on the earnings portion of the withdrawal. Your contributions will never be taxed or penalized since they were made with after-tax money. So families who are tempted to take money out of their 529 plan to pay bills or other expenses may want to think twice. In addition to paying taxes and the penalty, theyíll also miss out on compound earnings they would have otherwise received and might not be able to catch up in time to pay for college.

RELATED: 6 must-know 529 plan rules

4. They monitor their investments

A 529 plan is an investment account, which means that itís value will go up or down based on the performance of the investments that make up your portfolio. You can review performance on your planís website or in your quarterly statements, or check Savingforcollege.comís quarterly performance rankings. Another option is to compare the performance of your plan with your retirement fund or other investment. The IRS allows one tax-free plan rollover per in a calendar year, so if youíre plan is underperforming it might be time for a change. However, if youíve been collecting a state tax benefit and you switch to another stateís plan you might be subject to a costly recapture tax.

If you notice a particular investment option isnít performing well across the board, or your child is getting closer to college and you want to shift your focus toward more conservative options, you may want to make some changes within your plan. 529 plan owners can change investment options twice during any calendar year.

5. They ask for help

Itís no surprise that many families have a difficult time saving enough to pay for higher education. College is quickly becoming one of the biggest purchases a family will have to make. You can easily pay for a car with one year of private school tuition, and in some cities, four years of tuition would cover the cost of a home. Fortunately, 529 plans make it easy for relatives and loved ones to help contribute. For example, a grandparent can open a 529 plan for a grandchild and collect a state tax deduction on contributions (if their state offers this benefit). The grandparent can also use a 529 plan as an estate-planning vehicle. If they choose to spread a contribution over a five-year period, deposits up to $70,000 per individual will qualify for the annual gift tax exclusion. The assets will be removed be from their estate, but they will retain control of the funds over the life of the account.

Itís also easy for loved ones to contribute to a 529 plan owned by the child or one of their parents. Many offer online and social gifting platforms where you can send a secure electronic payment for a special occasion. The account owner can keep track of the gifts and even send personalized thank you cards. Even a modest gift will compound over time and can have a big impact on a childís future.

RELATED: 5 ways to judge your 529 planís performance

Americans collectively owe more than $1.2 trillion in student loan debt. Whatís more, according to data recently released by the Department of Educationís College Scorecard, many students with college degrees are earning less money per year than those with only a high school diploma, making it almost impossible to pay off their loans. So how can families prevent their children from making the wrong choices that can lead to excessive debt? Save for college in a 529 plan, of course! With tax-free earnings and tax-free withdrawals on qualified higher education expenses, for most families using a 529 plan is a no-brainer. But if you want to really maximize your savings potential thereís more to it than blindly socking money away. Here are six habits of truly successful college savers.

1. They save regularly

Most 529 plans offer automatic investment plans that link to your bank account, allowing you to ďset and forgetĒ regular monthly contributions. This method of paying yourself first has been proven to lead to disciplined savings and, in most cases, investment success. They key is to begin by contributing as much as you can afford each month, even if itís only a mere $25, and slowly increase the amount over time as your situation changes.

529 plans are professionally managed accounts, which means an experienced asset manager has designed the investment portfolio with specific goals in mind Ė so you donít have to. You simply select an investment option based on your goal and risk tolerance (e.g. conservative, aggressive), or choose an age-based option that will automatically adjust your investments as your child gets closer to college.

RELATED: 75% of college savers donít know how to invest their savings

2. They save with a goal in mind

While saving something is always better than saving nothing, families also need to make sure theyíre saving enough. To estimate future college costs, you can start by using Savingforcollege.comís College Savings Planner, or a similar calculator. This will give you can idea of what the sticker price of a school will be, based on current costs and taking inflation into consideration. You can also figure out how much youíll need to invest each month in a 529 plan to meet that goal.

Saving the total sticker price of your dream school might seem unattainable, but donít be discouraged. Students rarely pay full price for college after grants and scholarships are awarded. Find out how much the school typically gives out, and do some of your own research to find additional scholarships to close your savings gap. As the student gets closer to college, he or she may also want to consider a work-study program to help pay tuition.

3. They follow the rules

In order to take advantage of the tax-free earnings and tax-free withdrawals offered by a 529 plan, you have to spend the money on qualified higher education expenses. This includes tuition, fees, books supplies and other equipment required for course attendance and enrollment. Currently, computers and other technology purchased for college are not considered qualified unless the school requires them, but a bill (H.R. 529) passed the House earlier this year will change this rule if it becomes a law.

If you end up making a non-qualified purchase, youíll incur income tax as well as a 10% penalty on the earnings portion of the withdrawal. Your contributions will never be taxed or penalized since they were made with after-tax money. So families who are tempted to take money out of their 529 plan to pay bills or other expenses may want to think twice. In addition to paying taxes and the penalty, theyíll also miss out on compound earnings they would have otherwise received and might not be able to catch up in time to pay for college.

RELATED: 6 must-know 529 plan rules

4. They monitor their investments

A 529 plan is an investment account, which means that itís value will go up or down based on the performance of the investments that make up your portfolio. You can review performance on your planís website or in your quarterly statements, or check Savingforcollege.comís quarterly performance rankings. Another option is to compare the performance of your plan with your retirement fund or other investment. The IRS allows one tax-free plan rollover per in a calendar year, so if youíre plan is underperforming it might be time for a change. However, if youíve been collecting a state tax benefit and you switch to another stateís plan you might be subject to a costly recapture tax.

If you notice a particular investment option isnít performing well across the board, or your child is getting closer to college and you want to shift your focus toward more conservative options, you may want to make some changes within your plan. 529 plan owners can change investment options twice during any calendar year.

5. They ask for help

Itís no surprise that many families have a difficult time saving enough to pay for higher education. College is quickly becoming one of the biggest purchases a family will have to make. You can easily pay for a car with one year of private school tuition, and in some cities, four years of tuition would cover the cost of a home. Fortunately, 529 plans make it easy for relatives and loved ones to help contribute. For example, a grandparent can open a 529 plan for a grandchild and collect a state tax deduction on contributions (if their state offers this benefit). The grandparent can also use a 529 plan as an estate-planning vehicle. If they choose to spread a contribution over a five-year period, deposits up to $70,000 per individual will qualify for the annual gift tax exclusion. The assets will be removed be from their estate, but they will retain control of the funds over the life of the account.

Itís also easy for loved ones to contribute to a 529 plan owned by the child or one of their parents. Many offer online and social gifting platforms where you can send a secure electronic payment for a special occasion. The account owner can keep track of the gifts and even send personalized thank you cards. Even a modest gift will compound over time and can have a big impact on a childís future.

RELATED: 5 ways to judge your 529 planís performance

 

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