Experts often advise parents to review their plans to save for their kids' college education annually. For some parents, the review is a simple fine-tuning of existing college savings plans, says Michael Fitzgerald, chair of the nonprofit College Savings Plans Network. For others, the review means depositing those first dollars into a 529 plan account, a tax-advantaged investment account for higher education.
"Paying for school is something every family of a college-bound student needs to think about," says Ryan Law, director of the University of Missouri Office for Financial Success. He advises parents to start with a small contribution. One year of $25 monthly deposits, for instance, adds up to $300, or a semester of textbooks.
[Avoid these costly mistakes when saving for college.]
Parents who have or are considering opening a 529 plan in 2013 should follow this annual college savings checklist.
1. Learn about 529 plan features and requirements: Whether you are starting a 529 plan for the first time or want to learn more about your existing plan, "The best thing anyone can do is educate themselves about 529s," says Jeff Howkins, president of Sallie Mae's Upromise Investments Inc.
He suggests beginning research on Upromise's 529.com and the College Savings Plans Network site to get a good understanding of how plans work, including flexibility in investment choices, direct debit options, and minimum contribution requirements. "Some may require you to open an the account with $25; some require $3,000," he says.
2. Study your state's 529 plan(s): This means reviewing tax benefits, grants, prices, and investment options. While parents can pick a plan from anywhere in the country, the plans in their home state may offer special tax incentives or matching grants, Fitzgerald says. For example, parents in Arkansas, Nevada, or Louisiana would want to consider their state's plan first to avoid possibly missing out on hundreds of dollars of matching grants.
Other states such as Iowa have tax deductions that are only for their state's 529 plans. Families who already have plans, in or out of state, should ask plan managers if their existing 529s qualify for tax deductions or credits, Fitzgerald notes; if they don't, parents should consider starting a new plan in their home state.
Never assume tax benefits will be the same every year. Check this year and "make sure that your in-state tax benefits haven't changed," Fitzgerald says.
[Learn more about getting a 529 plan boost from your state.]
3: Watch tuition rates: Next to finding the money to save, the hardest part of saving for college is figuring out what tuition rates will be 10 years into the future, Fitzgerald says. "As tuition rates skyrocket, some parents may feel more comfortable with prepaid tuition programs, where you pay a set amount per month knowing the amount of college credits you paid for will be available to you in the future," he notes.
Families should review college savings plans to determine whether they would rather hedge against tuition increases in the stock market or buy tuition in advance, Fitzgerald notes. The best option may be having one plan for room and board and another for tuition, he adds. "Every family has to hedge against rising tuition in a way that they're comfortable with."