NerdWallet: How To Save For Your Child’s College Education

It’s not a secret the job market is competitive and having a Bachelor’s degree has become the minimum requirement for many employers, while some even prefer a higher degree.

There is a lot of “sticker shock” surrounding the price tag of a college education and many students right now are graduating with thousands of dollars owed in student loans and the stress that comes with paying off that debt. As a parent you want to help prevent that burden for your child, and one option at your disposal to help you save for your child’s education is to use a 529 plan.

According to a recent study, 48 percent of Hispanic families are more likely to use general savings accounts to save for college, but a 529 plan is a better savings vehicle designed specifically to save for educational costs. There are two types of 529 plans: savings and prepaid.

Below are some NerdWallet tips on how to start saving for college.

529 Savings Plan vs. 529 Prepaid Plan

The savings plan is like a savings account meant for future expenses. You contribute money to your account that is tax-advantaged and you can invest that money. Depending on what state’s plan you use, you will have different investment options available and the earnings from your investment are tax-free. You can use the money to cover most educational expenses, including tuition, mandatory fees, room and board, books, and computers.

A prepaid plan on the other hand, allows you to “buy” college credits for a university in your state at a current rate. This “purchase” locks in tuition prices, meaning it protect students from needing to pay higher prices in the future if inflation increases those costs. Students must be confident, however, that they will attend a particular school and should note that the prepaid plan only covers tuition and mandatory fees.

Account Costs

529 plans are rather accessible but many come with a price, whether it’s to pay an application, management, annual, or administrative fee(s). The amount of money in the account may determine the fee percentage. If you are hesitant about paying fees, you may want to consider a prepaid plan. While it is limited to 270 colleges and universities right now, there are typically overall fewer fees and investors are not charged for account management fees.

Contribution Limits

There are several stipulations to 529 plan contributions. The maximum contribution per year is $14,000 per beneficiary and if you have a spouse you can contribute an additional $14,000 on their behalf. If desired, five years of maximum contributions ($70,000) can be deposited at the same time also, though you will then need to wait until the 6th year to begin making contributions again. The accounts are not to exceed $360,000, although that amount can still grow through investment gains.

Choosing a Plan

Some states offer tax deductions or tax credits if you contribute to a 529 account. If your state offers this advantage, you may want to consider choosing a plan in your state. However, you are also free to choose a plan outside the state in which you currently reside. For a list of the best 529 plans, NerdWallet Investing provides a state-by-state comparison.

Don’t wait to start saving for your child’s college education. Be sure to also look into other savings vehicles or options available to you besides your regular savings account, before making your choice.

Neda Jafarzadeh is a financial analyst for NerdWallet, a financial literacy organization that helps consumers learn how to choose the best credit card, the right broker, find cheap car insurance, and make smarter financial decisions overall.

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