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Start Saving for College Today

Saving for college, like saving for retirement, is all about planning. Unfortunately, it’s on a much shorter timeframe than the typical retirement plan (18 years versus 30-40 years). So what can you do? Here are some tips to make the most of your time (and money).

college savings programs

The average private college tuition is expected to top $400,000 by the time today's newborn turns 18.

Investing for College, Cradle to Classroom


Almost every state has 529 plans. But shop around. They have different investment options and, in some cases, tax breaks that supplement federal tax benefits. You’ll want to weigh the quality of the investment options against the tax benefits you might earn by staying in state. The rule of thumb is if the tax benefit is worth more than 5% of your initial investment, it typically trumps the costs of even an expensive plan. In that case your best bet is to stay put.

If, however, you live in a state that offers no tax perks or has no income tax, you might as well shop around for a plan with a good slate of investment options and low costs. The same goes if you live in one of the six that delivers tax benefits no matter where you invest.

When setting up your 529, title the account in your name. Only then will colleges count the money as a “parental asset,” meaning those dollars will lower your child’s potential financial aid by a maximum of 5.64% a year. Set it up in your child’s name and that amount rockets to 20% a year.

If you start while the future student is still in diapers, you’ve got plenty of time to ride out market swings and take advantage of compounding. That’s why many experts recommend loading up on stocks and starting aggressive with an age-based approach. Today, the average age-based 529 plan starts off for newborns with about 80% invested in stocks.

This is the time to shift gears. Sure, you may still need stocks for growth, but you’ll likely want to move some money into bonds for stability. How much? Well, that’s up to you. You can go autopilot with an age-based 529, but more than likely you’ll want to look at how your portfolio has been performing and tweak your allocations based on that. Whatever you do, remember that you’ll still need the stomach to ride out a bear market; those 20% declines take place almost every five years, on average. Of course, a 10-year-old has nearly a decade before most of the money needs to be spent, and while stocks can be volatile, they also have tended to snap back quickly. In the worst five-year stretch since the Depression, 1970-74, stocks finished down only about 2.4% a year. Over 10-year periods after the 1930s, they’ve never lost money.

Around your student’s sophomore year of high school, consider a much more conservative 529 portfolio (such as cutting equities to 20% or 30% with the balance moved into bonds and cash). Check your age-based account to make sure it’s in line. If it’s not, consider shifting a portion of your 529 funds to get a more conservative allocation or add a separate money-market or bond fund.

One strategy is to look two years ahead. That is, if your child is a junior in high school, have enough money in cash (not just bonds) to cover your expected withdrawals the first year of college. The following year, you’ll want to double that amount. Once your child is in college, you can move everything to cash and start spending down the balance.

College Savings: Myths About 529 Plans


Not exactly. Your 529 is reported on the Free Application for Federal Student Aid (FAFSA) and the savings reduces eligibility for need-based aid by a maximum of 5.64 % if the plan is in your name. That’s a $564 reduction with $10,000 in a 529 plan. And that leaves you with a tax-free $9,436 available to pay for college costs. Beware, though. If the plan is in your child’s name, the setback will be a more severe 20%.

Actually, you can use money saved in a 529 to pay for college costs at any college or university that is eligible for Title IV federal student aid. There are even a few hundred institutions outside the U.S. eligible for 529 plan money.

The truth is, nearly all 529 college savings plans include an S&P 500 investing option that will mimic the performance of the stock market as a whole. Of course, the stock market will drop by 10% at least two to three times in any 17-year period. Many manage that risk by using an age-based asset allocation that shifts the mix of investments from aggressive to conservative as college approaches.

Money in a 529 can be used to cover tuition, plus room and board, books, supplies, and equipment (including a computer, peripherals, software, and Internet access).

The money is yours. You won’t lose it if the beneficiary doesn’t pursue a higher education—you just have very specific options. First, you can switch the beneficiary to someone else, including yourself. If you don’t have a suitable beneficiary that needs education funding, you can withdraw the funds. However, the will be subject to ordinary income taxes and a 10 percent tax penalty on the earnings portion of the distribution if the money isn’t used for qualified education expenses (the 10% penalty is waived if your child gets a scholarship).

Retirement vs. My Child's College Education

You need to save for your child’s education. But you also need to save for retirement. Should you put your retirement savings on hold while you meet the more short-term goal of college? This depends entirely upon your unique situation and priorities. Unfortunately, while your child’s college education will come due sooner than your retirement, postponing saving for retirement may cost you years of tax-deferred growth. The ideal course is to save for both simultaneously…which means you may have to compromise. Here are some considerations:


  • Be realistic about your college choice. Is the pricey private college worth it, or is there a less expensive college that offers everything you need at a better value?
  • Have your child contribute money to their college expenses (the majority of college students finance a portion of their education with student loans).
  • Chase those scholarships. There are more out there than you know. Expect your child to be proactive in seeking out and applying for them.
  • Consider reducing your standard of living to free up more money to put toward college.


  • If you delay your retirement and work longer, you’ll have more time to save.
  • Consider more aggressive investments (while being aware of the risks).
  • Consider reducing your standard of living now to free up more money for retirement. Or, think about a more conservative standard of living in retirement that will require less to fund.

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