Saving for College: Be Prepared

There’s no doubt that a college education can be costly, but according to U.S. Census Bureau data, someone with a college degree can earn, on average, 60 percent more than a person with only a high school diploma. With states tightening their belts and higher-education budgets being squeezed, here are some tips on saving for college.

  • Start planning and saving for college as early as possible. “Small, steady savings — ideally starting as soon as possible after a child is born — can help parents manage the sticker shock of a college education,” said Luke W. Reynolds, Chief of the FDIC’s Community Outreach Section.
  • Research your savings options. Some come with substantial tax benefits or other incentives. In each case, carefully consider the potential risks, costs and limitations before investing any money. Examples include: Section 529 college savings plans. There are two basic kinds of 529 plans: pre-paid tuition programs that allow savers to lock in today’s prices for future tuition payments at designated universities and traditional savings plans that allow families to contribute money into investments or FDIC-insured deposit accounts. Under the FDIC’s rules, in most cases, deposits that a 529-plan administrator places at a bank on behalf of different individuals are federally insured up to $250,000 for each participant. U.S. Savings Bonds. Savings bonds are backed by the government, but one trade-off for the safety is a moderate rate of return. For qualifying taxpayers, the interest earned is exempt from state or local income tax, and the bonds may be exempt from federal income tax when they are used for education expenses.
  • Special savings programs that may be offered in your area. For example, an increasing number of state and local government programs, often with assistance from nonprofit and philanthropic organizations, are providing incentives to help low-income families save for college. These initiatives typically involve grants or matching funds that go into a child’s college savings account.
  • Children’s savings accounts can be a way of encouraging early saving habits while accumulating needed financing for education. Coverdell Education Savings/Education IRAs. Up to $2,000 can be contributed to this while the child is age 17 or younger. Unfortunately, the contributions aren’t tax deductible; however, deposits and earnings can be withdrawn tax-free as long as used to pay eligible schooling expenses.