With college costs increasing at an average annual rate of almost 6 percent, it's best to start your college savings fund early in your child's life.
If you begin when your child is born and set aside $200 each month in an account earning 6 percent annually, you'll have enough to cover approximately 21 percent of the cost of four years at a private college (current average sticker price of $35,600 per year), or about 49 percent of the cost of four years at your public university (current average sticker price of $15,200 per year). If you start at age 12, you are looking at $350 per month.
Establish a Savings Program.
Some refer to automatic contribution plans as "painless" savings. Whether it's truly painless, automatic contributions are certainly an effective way to build up savings over time for college. Most 529 plans offer automatic contribution plans with minimum investment levels of $25 per month. Some of the 529 plans that charge an annual account-maintenance fee will waive the fee as an incentive for enrolling in the automatic contribution plan.
Rewards Programs can Boost Your College Savings
Everyone likes "free money." Several companies offer rewards programs that link directly to one or more 529 college savings plans. Over time, your purchases can generate rebates that add up to hundreds and potentially thousands of extra dollars for your child's college education.
Upromise and Futuretrust are two companies with popular 529 rewards programs. The Fidelity 529 Rewards American Express Card offers a 2 percent rebate on your card purchases for direct deposit to any of the seven Fidelity-managed 529 plans.
Plan Ahead for Financial Aid
Demonstrating financial "need" through the FAFSA application process becomes more important as interest rates continue to drop on subsidized Stafford Loans. Steps you take now can enhance your child's financial aid prospects in the future.
For example, avoid placing investments in UGMA or UTMA custodial accounts because those assets will be counted heavily against aid eligibility. If your child already has money in an UGMA or UTMA account, consider moving those funds into a 529 plan prior to filing the FAFSA. A special exception in the law assesses student-owned 529 accounts at the lower rate applied to parent assets. But realize that any capital gains triggered by liquidating the existing UGMA/UTMA investments can increase taxes and reduce financial aid eligibility.
Don't spend too much time planning for financial aid before your child reaches high school. Chances are the eligibility formulas as well as your personal financial situation will change significantly by the time your child gets to college.
Be Cautious Before Making Changes
Last year, the IRS allowed you two investment changes to your 529 savings plan. However, at the time this article was written, the IRS had not extended this rule into 2010, leaving you just one investment-change opportunity for this year. If early in the year you decide to switch out of one option in your 529 plan and into a different one, you may be precluded from doing it again until 2011 rolls around.
You can also roll over your 529 account tax-free to a different 529 plan as long as there has been no other rollover for your beneficiary during the previous 12 months. Unlike the investment change restriction which is policed by the 529 plan, the rollover restriction must be monitored by you.
Neither restriction applies if the beneficiary is being changed on the account. This exception provides a great deal of flexibility to the family with at least two children.
That being said, there are other alternatives to finance college tuition in scholarships, grants and awards that should be reviewed to see what you may qualify for. One source that is very helpful is located here.