If you’re worried because you haven’t saved much—or anything at all—for your child’s college costs, you’re not alone. According to Sallie Mae, a leading provider of student loans, only about half of American families are saving for college. Even the savers have an average of just $16,000 set aside.
The bad news: That’s just a small fraction of the hefty price tag of college. The good news: With a student in middle school, or even in early high school, you still have time to bolster your savings in a helpful way. Here’s what the experts say.
Better late than never.
The old adage holds true when it comes to saving for college. “It’s never too late to save. Every dollar you save is a dollar less you will have to borrow,” says Mark Kantrowitz, a nationally recognized expert on paying for college. “And every dollar you borrow is going to cost you about $2 to pay back.” This is an overall average for all borrowers. Some will pay more, and others will pay less. This will depend on the type of loan, fees, interest rate, and other factors.
Even minimal savings can be helpful. Take books, which—depending on your student’s major—could cost several thousand dollars or more in total. Why use borrowed money to pay double for those books if you can instead save that money over the next few years?
Savings don’t significantly impact financial aid.
You may have heard that saving for college isn’t worth it because colleges will reduce your student’s financial aid package by whatever amount you’ve got in the bank. Not true.
The most-used financial aid formula calculates parental assets at just 5.64 percent. “That means for every $10,000 you’ve saved, the reduction in financial aid will only be $564,” explains Timothy Gorrell, executive director of the Ohio Tuition Trust Authority (OTTA), which administers CollegeAdvantage, Ohio’s 529 college savings plan.
In other words, you’ll get to use most of your college savings in addition to any financial aid. But if you borrow that $10,000 for college expenses instead of saving it ahead of time, the extra loan will cost you much more in interest than that $564 reduction in financial aid.
Use a 529 college savings plan.
You may be tempted to save for college in a regular savings account, but there’s a better way to do it: a 529 college savings plan.
529 plans, which are sponsored by nearly every state, offer a tax-advantaged way to save for college. The money you save in a 529 grows free from federal and state taxes; a regular savings account does not. Withdrawals are also tax-free, as long as the money is used for qualified education expenses. “That includes tuition, room and board, books, computers, and other supplies,” says Gorrell.
You can use money saved in a 529 plan toward a bachelor’s degree, an associate’s degree, a graduate degree, or even a vocational degree. “There is also no shelf life on a 529 plan,” says Gorrell. “It’s not like you have a certain amount of time to use it. It can continue to grow.”
Starting a 529 Plan
For example, if you start a 529 plan when your child is in middle school, you could wait to tap the funds until toward the end of college. “That can be a decade of savings,” notes Gorrell. “Or you could use it for graduate school.”
It’s easy to set up a 529, but you’ll want to do some research. “You are not limited to your state’s college-savings plan,” notes Gorrell. You might not know that you can put your money in any 529 plan of any state you want, regardless of what state your child will attend college in or whether you have any connection to the state that sponsors the plan. In 35 states, residents can get a a tax deduction or other tax benefits on their state income tax for investing in their own state’s plan—an advantage worth exploring.
In general, you’ll want to look for a plan with low fees, strong ratings, and other advantages like tax benefits. Most importantly, regardless of what plan you choose, make that important choice to start saving for your child’s future college costs now.