Learning Center

The Dollars and Cents of a College Education

College savings plans help take the financial sting out of paying for school.

piggy bank with mortar board and diploma

Going to college is the dream of a lifetime for many people. It's also a substantial investment. According to CollegeBoard – an association of almost 6,000 colleges across the U.S. – the average annual cost of tuition and fees for in-state students at public four-year institutions in 2012-13 was $8,646.

Add another $9,498 for room and board and you've got an average cost of more than $18,000 per year (out-of-state is even higher at $21,533). This doesn’t even include textbooks or other school supplies.

The key to saving for college is to start as soon as possible. The longer you save, the more you can put away and the longer it has to grow. For example, if you saved $50 a month from the day your child is born through age 17, your investment (deposits and interest) would yield about $20,000, assuming a 7 percent return.

CollegeBoard offers a savings calculator to help determine how much to save for your situation. Just a note of caution, though, putting too much money in your child's name might work against them if they apply for financial aid.

Tools for Saving

Mutual funds: These put a professional in charge of your savings so you don't have to watch the markets daily.

Roth or traditional IRA: While most people use IRAs to fund retirement, they can be used to pay for a college education. The traditional 10 percent penalty on early withdrawals is waived if it is used for qualified higher education.

529 savings plans: This is a state college saving plan that offers saving as well as tax breaks. These plans have no income limitations or age restrictions, meaning you can start a 529 no matter how much you make or how old your beneficiary is. These plans also allow you to continue making deposits while a student is still in school. Because these are state-based plans, they vary slightly from state-to-state. Also, each state determines what the lifetime contribution limit or account balance cap will be. More information about 529 savings plans is available at savingforcollege.com.

Coverdell Education Savings Account (formerly known as the Education IRA): Coverdell accounts can be opened as soon as your child is born and you can contribute up to $2,000 per year. Withdrawals are tax-free. You are allowed only one account per child, but you can have separate accounts for each child. This money can be used to pay for elementary, secondary or college education and the interest earned is tax-free.

US Savings Bonds: Including Series EE, Series I, Zero Coupon Bonds and Treasury STRIPS, and Treasury Inflation-Indexed Securities. While not as aggressive in growth, these are very stable investments.

Because individual financial situations and savings options vary, contact an accountant, tax advisor or personal investment consultant for investment and tax advice for college savings plans.

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