Get a Head Start on College Savings

The morning after my husband, Tom, and I learned that I was pregnant, I found him quietly tapping and clicking on his laptop. If I weren’t already sure that we were a match made in personal finance heaven, that moment would have confirmed it: He was looking up projected college costs a couple of decades down the road.

A year later, we’re getting serious about socking away money for our son’s future education expenses. It’s a daunting prospect. In 18 years, attending an in-state public school for four years will cost about $233,000, assuming 5% yearly inflation in average college costs, according to the College Board’s College Savings Calculator (opens in new tab); a private college will run $528,000. Plenty could happen before 2037 to reduce the price of a college degree, but I’m not counting on it.

How much to save. A common guideline is to save about one-third of your child’s expected college expenses and cover the rest with loans, financial aid and current income while the child is in college, says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com (opens in new tab). That means we’d have to save anywhere from $78,000 for a four-year, in-state public school to $176,000 for a private college.

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The numbers are intimidating, but, says Angie Furubotten-LaRosee (opens in new tab), a certified financial planner in Richland, Wash., “anything saved is better than zero.” Thanks to the power of compounding interest, even if you set aside only a small amount, you’ll benefit from an early start.

As you decide how much you can afford to save, put your own needs first. If you haven’t stashed at least three to six months’ worth of living expenses in an emergency fund or paid off high-interest debt, focus on those tasks. Retirement savings should also take priority over paying for college. Your options for funding retirement are limited, but your children can apply for scholarships and grants, take out loans, work part-time, and choose relatively inexpensive schools.

The 529 advantage. A 529 college-savings plan is a great place to save. Your contributions grow tax-free, and withdrawals aren’t taxed as long as you use them for qualified college expenses, including tuition, room and board, books, and computers. Generally, you’ll pay income tax and a 10% penalty on earnings—but not contributions—for nonqualified withdrawals.

Every state except Wyoming has one or more 529 plans. You can invest in any state’s plan, but many states offer a tax deduction or credit on contributions for residents who invest in their state’s plan.

If your state has no tax break—or if it’s one of a handful that offer a break no matter which state’s plan you choose—shop for a plan with low fees and strong investment options. You can often choose among age-based portfolios that dedicate a higher portion of the savings to riskier (but higher-reward) stock investments in your child’s early years and shift to a more conservative allocation as college nears. Go with a direct-sold plan, which comes with lower fees than a broker-sold one. Compare plans at Savingforcollege.com (opens in new tab).

Tom and I went with Ohio’s CollegeAdvantage Direct 529 Savings Plan (opens in new tab) (Ohio is where we grew up, and Tom has maintained residency there as a military officer). In addition to an initial chunk of cash, we are having $250 transferred into it monthly. If we keep up the contributions and earn a 7% annual return, we’ll have about $119,000 in 18 years. Even if we have to dial back our savings later, we hope that getting off to a strong start will put a sizable dent in our son’s college bill.