Having a bevy of star student stickers on your tests may not be enough to pay for the college of your dreams. Along with maintaining good grades and scoring strong standardized test scores, where and how you save for college will have a tremendous impact on what school you attend and how much student loan debt you have to take on to graduate. We know—talking about college savings vehicles may be the only thing more snooze-worthy than your last physics final, but it is a crucial part of your college and post-college life. Let's jump in...
Make no metaphorical bones about it—saving for college is hard, for a couple of reasons. First and foremost, your family is not exactly saving in the best of economic climates. With abysmally low savings return rates, high unemployment, salary freezes, a still-tanking housing market, and skyrocketing college prices, holding on to your income can be as hard as catching a golden Snitch. Which is why it is crucial to choose the right college savings vehicle for your family early and to get the most interest you can. Unfortunately—and this is point number two—new parents do not get a crash course in saving for their child's collegiate future. According to a 2009 survey conducted by the College Savings Foundation, nearly 41 percent of parents have saved nothing for their children's education and among those who have, 28 percent have saved less than $5,000 per child. With a bucketload of college savings vehicles out there, selecting the one that will provide the greatest returns, give the most tax benefits, and impact your financial aid package the least can be harder than scaling Mount Everest and winning the lotto in the same day. Before we dive into what the different vehicles are, here is why selecting the right one is so darn important:
Family A and Family B have babies the same year. Family A socks away $50 a month in a 529 college savings plan from the day their child is born. Over the years, the plan generates an average 5 percent interest rate. Family B saves $100 a month in a savings account in their baby's name starting when their child turns 5. That account generates a 1 percent interest rate. By the time both kids reach college age, Family A will not only have more savings than Family B ($16,879 vs. $16,571), they will also have lower federal income taxes to pay AND be eligible for more free money from the government. Triple whammy.
The point is even small decisions, like when to start saving and where to put your money, can have a Godzilla-sized impact on your financial future. Families who have a strong financial plan early and stick to it will have more college cash and be eligible for more free government money than families who wait. In this section, we are going to look at some of the most popular college savings vehicles, discuss the pros and cons of each, and provide a few other alternatives for your family to consider. If you want to compare one plan to another, skip straight to the handy dandy "cheat sheet" we have included with each plan or jump straight to our College Savings Comparison Chart to compare plans against each other.