Parents of high schoolers may feel it's too late to open 529 college savings plans, post-secondary education investment accounts with tax benefits. But it isn't: Any amount saved reduces the amount families need to borrow to pay for college, experts say. Plus, parents who don't open 529 plans at all can lose opportunities from state programs that add to college savings by matching contributions or offering tax deductions.
[Take these 4 steps before opening a 529 plan.]
Follow these 5 tips for maximizing college savings in just a few years:
1. Set realistic savings goals with deadlines: "The plan doesn't need to be paying for all college expenses," says Joe DeAnda, spokesperson for both California State Treasurer Bill Lockyer and ScholarShare, California's 529 plan. Set a goal of saving for a semester's tuition, a semester's or year's worth of textbooks, or a year's worth of an on-campus meal plan, he suggests. Then set a monthly savings amount to reach that goal. For instance, saving $500 for one semester's textbooks requires saving slightly more than $10 per month for 4 years or about $21 per month in 2 years.
2. Save all the way through college: Parents have a larger window than they might think because savings can continue into student's college careers, DeAnda says. Parents can set a regular amount to be directly debited from their checking account or payroll deduction, he notes. The regular contribution won't stop until requested by the parent, DeAnda says. A $40 monthly contribution for 8 years totals $3,840 without any investment growth.
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3. Enlist help from friends and family: Send E-mail invitations for special events at college registry sites, websites that enable users to register for college savings contributions, much the way that engaged couples register for wedding gifts. The average Gradsave college savings registry site member who begins saving at 14 years old receives about $300 to $400 per birthday, holiday, or special event for which he or she has "registered" for college savings, yielding an average annual savings of $900 to $1,200, says Gradsave spokeperson Samantha McShine. At this rate, McShine notes, he or she will accumulate $3,600 to $4,800 by high school graduation.
4. Get help from state grants: Parents should contact their state's 529 plan managers about age limits for matching grants, a program provided by some states for matching 529 plan contributions, says Arkansas 529 Plan Project Coordinator Dale Ellis. For example, Louisiana and Kansas offer matching grants without any age limit. Arkansas allows accounts that benefit minors to receive their first grant before age 19 and continue until age 24. Parents should ask their state treasurer's office about income limits for earning matching grants, Ellis says.
[Read more about getting a 529 boost from your state.]
5. Deposit savings from state tax deductions into 529 plans: Parents who live in one of more than a dozen states that offers state tax deductions for 529 plan contributions can use the extra funds for college savings. For example, a Kansas family of four with a family Adjusted Gross Income of $45,000 contributes $600 to the oldest child's 529 plan. The family's tax rate is 6.25 percent, so the tax deduction value is $38. The $600 contribution is also eligible for a state matching grant. The $600 contribution, $600 matching grant, and $38 from the tax deductions totals $1,238 in college savings for this Kansas family in one year.
Parents in Kansas who don't meet income restrictions for the matching grants still qualify for state tax deductions of $3,000 per individual or $6,000 per married couple per 529 beneficiary, the person who will use the account for educational funding.
Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.