RESTON, Va., Nov. 12 /PRNewswire/ -- It's never too early for families
to begin saving for their child's college education. As with any goal, it
takes careful planning and commitment. And the earlier you can begin saving
-- ideally beginning with the birth of a child -- the better.
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For example, if a family saved $50 each month beginning with the birth
of their child and continued depositing $50 over 18 years at a rate of
return of 5 percent, compounded monthly and taxed at a marginal rate of 25
percent, they would have $15,295 by the time the child reaches college age.
If they increased their savings to $200 a month, their earnings would grow
to more than $60,000, with nearly $24,000 earned in interest alone.
"The more you save, the greater the down payment on your higher
education," says Martha Holler, spokesperson for Sallie Mae, the nation's
leading saving- and paying-for-college company. "And the greater the down
payment, the less you will have to borrow."
There are a number of savings options available today to help families
save for college. Best of all, each savings plan can be tailored to meet a
family's individual financing goals and investment needs.
529 plans
A 529 plan is a tax-advantaged investment vehicle designed to encourage
saving for future higher education expenses. With a 529 plan, families
place a select amount of money into a tax-deferred account to be used for
higher education costs. Earnings on a 529 investment, including capital
gains and dividend income, are continually reinvested tax free, and a 529
plan account is worth more over a long period of time than a comparable
taxable account.
Today, families have invested more than $122 billion in tax-advantaged
529 college savings plans, up from $2.4 billion a decade ago. When used to
pay for qualified higher education expenses, assets can be withdrawn free
from federal income tax, and in most cases, free from state income tax.
Earnings on nonqualified withdrawals are subject to federal income tax and
a 10 percent federal penalty tax, as well as state and local income taxes.
There are generally two types of 529 plans: prepaid and savings.
Savings plans allow participants to use their 529 plan account assets to
pay for tuition, certain room and board expenses, fees, books and supplies
at most accredited postsecondary schools in the United States. Prepaid
tuition plans allow you to prepay for college credits based on today's
current tuition rates, usually cover tuition and fees, and are typically
offered for a specific pool of participating postsecondary schools.
Specifics of prepaid tuition plans, including residency requirement, age
limitation on beneficiaries, minimum and maximum contributions, refund
policies and state guarantee of rate of return and principal, vary state to
state.
Reward programs
Various reward programs help families save money for college every time
they shop online, purchase gas or make any number of everyday purchases.
Upromise, the largest private source of college funding contributions in
America, has helped 8 million members earn college savings rewards on
everyday grocery and gas purchases, dining out and shopping online and at
retail stores. Enrollment at Upromise.com is free, and members can use
their accumulated rewards in several ways -- for college expenses, as
contributions to a Upromise-administered 529 college savings plan account
or to help pay down an eligible student loan.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account (also known as an Education
Savings Account, an ESA or Coverdell Account) is set up similarly to Roth
IRAs. However, an ESA is an investment vehicle targeted for education
expenses rather than retirement. ESAs and IRAs both allow participants to
make an annual non-deductible contribution to a specially designated
investment trust account. The account itself grows free of federal income
taxes.
"The bottom line is this: Saving early and consistently gives compound
interest the time to work its magic," adds Holler, "and families will have
a healthy start on paying for their child's future college education."
SOURCE Sallie Mae
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