Start Early with College Savings

Brian O'ConnellBy:  Brian O'ConnellBy: Savingforcollege.com

Financial gurus often tout the benefits of starting early when saving for college, and at face value, that seems like a logical strategy. After all, the earlier you start saving money, the more time there’ll be for earnings to compound and the more money you’ll have 18 years later.

The good news is that more parents are starting early on their college savings campaigns. Data from Fidelity Investments shows that 37% of U.S. parents are launching their college savings programs before their child turns two years-old – that’s up from 21% in 2016.

Parents who do so are really on to something. When you really look at the numbers, the benefits of an early college savings plan (and by early, we’re talking about starting the week the baby is born) really hit home.

Consider these figures. When you start stashing away $200 per month when your child is two years old, and keep doing so every month until the child reaches age 18, you’ll have $71,000 saved up for college (assuming a 7% average annual return on your investment savings.)

But if you start at age six, that figure drops to $45,000. If you wait until age 10, the number falls to $26,000. And if you start when the child is 14, the figure plummets to $11,000.

That should encourage parents to start saving for college as soon as possible. The question parents may rightly ask, though, is this – how do I get the maximum bang for my savings dollar?


The answer is to start early on the college savings train – save early and often – and use the following tools and strategies:

Clear the table. Before you start your college savings plan, clear your personal financial landscape first. This means paying off any debt, like credit card debt, that gets in the way of a college savings plans.

It’s also a good idea to create an emergency fund of about six months of living expenses in the event of a financial calamity, like the loss of a job or ill health. While saving for college is important, looking after your current household financial needs is critical.

That goes double for your retirement savings. Keep stashing 10% to 15% of your income to a 401k, IRA or other retirement plan – and don’t raid it to pay for college one day.


Invest in a 529 College Savings Plan. Turbo-boost your college savings campaign with a 529 Plan, offered in almost all 50 U.S. states.

529 plans enable parents to benefit from higher contribution limits than Coverdell Education Savings Accounts, and families can choose from among several investment funds to grow their college savings contributions. Generous aggregate contribution limits vary by state, but typically allow savings of several hundred thousand dollars. More than two-thirds of the states allow a state income tax deduction or tax credit on contributions to the state 529 plan.

529 plans also offer parents some potentially much-needed flexibility. For example, if a family steers money into one child’s 529 plan, and that child eventually chooses not to attend college, the account can be switched over to the “next in line” child, for his or her college spending needs.

Money in a student or parent-owned 529 plan will have a minimal impact on eligibility for need-based college financial aid.

A bonus – each parent can contribute up to $15,000 annually per beneficiary without having to pay gift taxes or use up their lifetime federal gift tax exclusion.


Get Disciplined

While these tools can help you save more for college, it’s also a good idea to create some discipline in your long-term college savings plan.

Do so by treating your college savings like a monthly cell phone or utility bill. Pay into your college savings account every month, and as you go along, try to add 5% or 10% more in savings, as allowable, every year. Set up an automatic transfer to from your checking account to the 529 plan account, so you won’t forget to contribute to your child’s 529 plan.

Do all that and you’ll have an ample amount of money saved by the time your son or daughter hits campus for the first time – and best yet, you’ll save thousands in student loan bills down the road.


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