To many parents, the thought of saving for a child’s college education can be overwhelming — and often, it can get put on the back burner until it’s too late to make a real impact on a college savings account. But it’s something you can (and should) do as soon as your baby is born in order to set your child up for success (and minimize the college debt that many Americans are accumulating).
The most common and popular college savings route is to set up a 529 plan, and with the myriad options available to parents, choosing the right one can be tough. PEOPLE spoke to Jordan Lee, CEO of CollegeBacker, for advice on how to navigate the crowded field of savings plans. His answers to common questions are below.
What is a college savings plan?
A college savings plan is an account exclusive for funds intended for education-related costs, and it is “tax advantaged,” meaning you deposit pre-tax dollars directly into the account. “There are other options to save for college (for example, UGMA and UTMA trusts, a Coverdell education savings account) but they all have different limitations,” Lee says. “A 529 plan doesn’t have the downsides of others. They have have been around for decades, but 70 percent of Americans haven’t heard of them, and only 16 percent of families that should have one, have one.”
Every state offers a 529 plan, as do a handful of private companies, which is “great,” as Lee says. However, “it also creates so many options that parents struggle to figure out what makes sense for them. You might not even necessarily want to go with your state’s own 529 because there might be a better plan for you. It’s overwhelming how many options are out there.”
How do I find the right 529 plan for me?
Lee’s company CollegeBacker aims to assist parents in choosing the right plan. “We’ve also made it a social experience, so you can involve friends and relatives right from the outset,” he says. “We call it ‘circlefunding,’ like crowdfunding but instead of from strangers, from grandparents, aunt and uncles.”
“If you go to savingforcollege.com or do a little Googling, it’ll help you see the benefits from a tax perspective and decide if your state’s plan is right for you,” he adds.
“The vast majority of people just want to get to the finish line with the right plan that’s low-cost,” he says. “Most people pick a standard fund based on a target date (like when the child turns 18); the investment plan starts more aggressive then moderates over time, becoming lower risk by the time the kids are in high school.”
How do I open a 529 plan?
“Getting started with a 529 doesn’t need to be a complex and time-consuming process,” Lee says. “You can visit CollegeBacker.com to get going in just a few minutes.” (You can also do it via your state’s 529 site or an investment website you already use.)
No sit-down with a banker required; once you do figure out which plan is right for you, you can both open your account and manage it online.
How much do I need to save for my child’s college education?
“A rule of thumb we share: If you target one-third of the expected cost of college — tuition, room and board — you’ll be in pretty good shape,” Lee says, adding that income, scholarships and financial aid would hopefully fill out the rest of the pie. “There are obviously variables, depending on if you choose a college that’s public, out-of-state versus in-state, or private. We do have a tool on our site that helps you figure out what the right monthly contribution is for you.”
But his big piece of advice is to start young. “If you start sooner than later, you can afford to have a lower average monthly contribution. And if you have a handful of people chipping in every year for, say, a birthday — even $10 a month — it’ll go a huge way.”
If you have teens and haven’t yet started saving, don’t worry. “It’s not too late! Even at 13 you still have five years. You just don’t want super risky investments at that point, even though they won’t grow as fast,” says Lee.
Why should I use a college savings plan instead of my savings account?
If you’re starting early, you can take bigger risks with your money in the hopes of growing it more quickly (and making your money go further) than it would in a standard low-interest savings account. Though there are days the markets go up and down, this is designed to be a long-term investment, and one that grows alongside the overall economy.
Though keeping money in a checking or savings account shields it from that volatility, “it’s just a trickle of interest,” Lee says. “Plus it doesn’t keep up with the inflation of college costs.”
Are 529 plans only for college?
Nope! Recently they were expanded to cover graduate school and even private K-12 programs, up to $10,000 annually.
What if I invest in a 529 plan and my child doesn’t go to college?
These plans are designed exclusively for educational costs, so if you remove it for any other reasons, Lee cautions, you will have to pay a penalty and tax on the investment account’s earnings. However, if you have other children or family members who will be attending college or graduate school, you can transfer the money for them.