If you have not started saving for your child's college education yet, you certainly are not alone. Many parents of young children find it difficult to set aside money for the future cost of college when there are other immediate financial responsibilities to fulfill. On top of that, parents face numerous choices for college savings plans, making it confusing to know which one to pick and how to get started.
Despite these challenges, you know that providing financial support for your child's college education is perhaps the most important thing you can do to help your child succeed in life. This simple guide can help you get past the obstacles that may be causing you to procrastinate. Keep reading to find a clear explanation of your savings options and some tips for how to achieve a successful college savings strategy. You may find that it is easier and more affordable than you thought to get your child started on the path toward a college degree.
Let's start with the basics—learning the A, B, C's of saving for college.
Acknowledge the cost—and importance—of a college education.
Many parents find it helpful to think of college as an investment, not an expense. The money you provide toward the cost of your child's education will be "repaid" in the form of higher salaries, better job opportunities, more employer-provided benefits and an overall higher quality of life. In fact, The College Board estimates that college graduates will earn 60 percent more during their lifetimes than someone without a college degree. This earnings benefit is so large that college graduates will recoup the cost of their education within a relatively short period of time.**
Choose a plan that fits your needs.
Here's an overview of the primary savings vehicles available to parents who want to save for their children's education.
Savings Account—The most basic way to save for college is to set aside money in a bank savings account. With a bank account, your money is safe and may earn a small rate of interest, depending on your financial institution and the type of account you choose. The primary advantages to a bank account are the security and accessibility it provides, however your money will grow very slowly over the years. In addition, there is no structure in place to help you stick with a consistent savings program.
529 Plan—You've probably heard a lot of talk about 529 Plans. They were created more than 10 years ago to offer tax advantages to people who are saving specifically for college expenses. With a 529 Plan, the money you invest is not tax deductible, but any interest, dividends or investment gain you earn are free from federal income tax as long as the money is used to pay for education expenses. You also may receive some state income tax relief depending on the plan you choose and the state in which you live. Each state in the country offers at least one 529 Plan, in partnership with a financial institution. You do not have to select your own state's plan. Each 529 Plan offers a different set of investment options, ranging from conservative to risky. Different Plans also have different account fees and requirements, so be sure to carefully research each Plan you consider.
Coverdell Education Savings Account (ESA)—Formerly known as an Education IRA, this type of account offers you similar tax advantages to the 529 Plan but with some added restrictions, such as an annual contribution maximum of $2,000 per beneficiary. One advantage to the Coverdell ESA is that it allows you to use the money for education expenses other than college, such as private elementary or high school costs.
Endowment Plan—A newer option that is growing in popularity worldwide is the Endowment Plan. This type of plan is actually an insurance policy that pays a guaranteed benefit to your chosen beneficiary after a certain number of years. Especially given today's uncertain financial markets, this plan may be very attractive to parents who don't want to risk losing the money they set aside for their children's education. In addition, these plans typically provide a higher "return on investment" than the average bank savings account, so you get the advantage of safe savings plus higher earnings on your money. Another advantage to an Endowment Plan is that it provides "structured saving," which means that you are told in advance exactly how much to contribute each month in order to reach your guaranteed savings goal. Many parents may find this disciplined approach extremely helpful as they strive to stay consistent in their savings efforts.
Gerber Life Insurance Company now offers the first Endowment Plan in the United States designed especially for college savings. The new Gerber Life College Plan provides a guaranteed benefit payment for a small monthly cost—almost as little as $1 a day. Benefit amounts are available from $10,000 to $150,000, and plan lengths can be chosen to coincide with your child's anticipated college entry. Click here to learn more about the Gerber Life college plan.
Based on these A,B,C's of saving for college, here are some tips to remember:
These simple suggestions can help you start a successful college savings strategy and provide the building blocks for your child's future success. Good luck!
*The College Board, Trends in College Pricing 2008. Includes tuition, fees, room and board.
Articles are provided for the general interest of our readers. Gerber Life Insurance is not responsible for any content and recommends that you consult the appropriate professional with any questions or concerns you may have concerning any financial or health related issues.