How To Save For Your Kid's College Education

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Saving for your kid's college education isn't easy, but you can probably save a lot more than you think. Here are six important things to know to start squirreling away and investing money in a smart way, including how to save in a 529 investment plan.

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1. Save as much as you can for college; it won't hurt you as much as you might think when it comes to getting financial aid.

A lot of people think, "If I save a pile of money for my kid's college, the school will just take it and I won't qualify for as much financial aid — so why bother saving?" Time to bust that myth: The money you save counts against you only a tiny bit when it comes to financial aid. You are much better off saving the money.

Here's how it works: Schools want you to save money so that you can pay them — they don't want to punish you for saving by giving you no financial aid. So when they calculate how much aid you're eligible for, it's like they put on magic glasses and almost look right past your savings.

If you save $1,000, for instance, the school would expect your contribution to increase by only $56, explains Sandy Baum, a senior fellow with the Urban Institute.

"So thinking that you would be better off if you just didn't have that $1,000 doesn't make any sense at all," Baum says. "It's a lot better to have the $1,000 than it is to have the $56 that the financial aid system would say you could get."

If you save a substantial amount, say $20,000, your expected contribution would go up to $1,100 — and you'd have that $20,000 to help pay for your child's education On top of that, a college may not have the resources to give you all the financial aid you could qualify for, so you might not get any less financial aid at all as a result of saving up a pile of money.

"You're much better off having saved the money," says Baum.

She recommends using a 529 plan, an investment account specifically made to save for college. You don't have to pay taxes on the gains you earn in the account if you spend the money on education. Most plans will set up an appropriate mix of investments for the account based on the age of your child.

If you start early enough, the money you invest could easily double by the time your kid goes to college.

2. Prioritize saving for your own retirement ahead of saving for your children's college — but still, save for both.

"It's not an either-or situation," says financial columnist Michelle Singletary. "You've got to do both."

3. Start saving something — even if you can't save the full amount.

Don't get overwhelmed and defeated if it seems impossible. Start small.

You might not be able to save enough so your kids can finish college debt-free, says Singletary. But you might be able to save enough to cover books or part of tuition, so they don't have to borrow as much as they would if you didn't save anything at all, she says.

4. The best way to save money is to make it automatic.

This goes for any kind of savings plan. Set up an automatic deposit from your paycheck; behavioral economists understand that humans are just not wired for saving for the future unless we do it this way.

"The research shows that when we make payments automatic then we're more likely to be successful," says Philip Gibson, an associate professor of economics at Winthrop University in South Carolina. "After a time, you might not even notice that the payments are going out of the account."

5. Shop around for low fees on a 529 account — aim for much less than 1%.

Each state has its own 529 program and its financial firm to manage them, and the fees can vary. Some charge just 0.1% or 0.2% in fees. You can choose any state plan you want — not just the plan in your state. A website called Savingforcollege.com can help you find a good plan.

While a 1% or 2% fee sounds small, remember that it's a fee charged against your return. So if you're getting a 4% annual return, a 1% fee takes a full quarter of that return away.

That seemingly small fee would substantially slow down the amount of growth in your portfolio, Gibson says. That said, some states will give you an extra income tax break if you invest in the state 529 plan where you live, Gibson says, so find out if your state offers that tax break and factor that into your decision.

6. Setting up a 529 plan creates an easy way for friends and family to kick in money to help you save for college.

Listener Phil Cunningham did this before his child was even born. The Washington, D.C., resident made a request for the baby shower.

"Look, we don't need a lot of onesies, we have a high chair. Please, don't buy us stuff," Cunningham told guests. "What we really, really, really would appreciate is if you just put in 10-20-50 bucks, whatever you can, into the 529 account."

Singletary says states like Maryland offer webpages that parents can set up and even add a photo of their child so that others can contribute.

"You can even send them a link," she says. "You can make it easy for people to help you grow your college money for your children."