Everything New Parents Need to Know About College Savings

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You've just ushered a new baby into the world, and are working to get your brain around all that you need to pay for. Diapers. Food. Child care. College.

College?

It may be nearly two decades away, but thinking about your child's college education now can help you save lots of money for when it's finally time to foot the higher education bill.

Saving for college will require a lot of discipline and patience, but you can make it happen with the right tools and knowledge. Let's take a look at some key things you need to know to send junior off to college without going broke.

Understand the cost of college

Let's start with an understanding that college is costly. The College Board says the budget for a moderately priced public college now is over $25,000 annually, and more than $50,000 for a private college. Prices have nearly doubled in the past decade and costs are expected to continue to rise. It's obviously impossible to know what college will cost in 18 years, but you can make reasonable projections based on current costs and the rate of inflation. Estimating the cost of college is obviously the one piece of information you need when determining how much to save.

Understand value vs. cost

You may have dreams of sending your child to whatever school they wish to attend, regardless of cost. That's fine, but you should also educate yourself on the schools with great reputations at a reasonable cost. The bottom line is that the most expensive schools aren't automatically the best. There are many ways for a student to get an excellent education without going into debt or wiping out your savings. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

Explore community colleges

Some people dismiss community college, but that's a mistake. Community colleges are perhaps the most underrated components of the academic system. There are thousands of these great colleges that offer solid education experiences for a fraction of the price of four-year institutions. They are excellent for students who aren't quite sure what they want to study or are perhaps wary of going away to school.

At community colleges, a student can often take care of many of the core requirements of a major, then transfer to a four-year institution where they can get the rest of the key coursework they need. This can ultimately save families tens of thousands of dollars. Consider community colleges when exploring future education options for your young one.

Open a 529 plan

Most states offer special savings plans that allow you to invest money for the purpose of saving for educational expenses. In most cases, you can withdraw the money tax-free when it's time to pay for college or qualified educational expenses. In a sense, they work like a Roth IRA, only for education.

Some plans also let you deduct contributions from your taxable income. These savings plans can be powerful because you can sign up for them as soon as your child is born. And if you save aggressively over the course of 18 years, you can end up with a sizable fund, perhaps even enough to cover the cost of tuition entirely.

If your child ends up getting a scholarship, you can use the funds for other educational expenses, such as a computer or other similar needs. If they don't attend college, funds can be used for vocational schools as well. You can also assign the benefits to someone else, such as a sibling or even a nephew, and there is no time limit on when you need to spend 529 funds, so you could even hold onto them and pay for your grandkids. (See also: The 9 Best State 529 College Savings Plans)

As a last resort, you can just keep the money for yourself — but you will have to pay taxes on gains as well as a 10 percent penalty. You won't pay the penalty if the beneficiary passes away, gets a scholarship, becomes disabled, or attends a U.S. Military Academy. If a child is disabled and can't attend college, it's also possible to roll 529 funds over to a 529 ABLE plan, which is designed to help disabled people with living expenses and other needs. (See also: Here's What You Need to Know About 529 ABLE Accounts)

Consider a prepaid tuition option

Depending on where you live, you may be able to take advantage of a type of 529 plan that allows you to lock in rates of college tuition now, potentially saving you tens of thousands of dollars. This can be especially powerful given that tuition continues to rise. Note that there may be some restrictions on what colleges the student can ultimately attend. (See also: Should You Save for College Using a 529 Prepaid Tuition Plan?)

Don't cheat your own retirement

You may wish to selflessly pump as much money as you can into your child's college savings account, choosing to worry about your retirement savings at a later time. But this is a dangerous strategy. If you choose to postpone retirement saving, you run the risk of not having enough saved to make ends meet when you stop working. And unlike college, you can't borrow money to pay for your retirement.

With smart planning and frugal living, you may be able to aggressively save for both college and retirement — but if you have to choose which to put money into, pick the retirement fund. If it helps, remind yourself that it's a way to ensure that your children don't have to help you financially in your later years. (See also: How to Keep Student Loans From Wrecking Your Retirement)

Let family members know how they can help

Your child's grandparents may be eager to help with future college costs, and you may have other relatives willing to pitch in as well. You can help guide them as to the smartest way to help.

In many cases, relatives may also receive immediate tax breaks by contributing to college savings plans, and they may even be able to gift money for college as a way to avoid future estate taxes.

Understand how financial aid works

It's important to learn how your income and savings can impact the type of financial assistance that your child may receive to pay for college. To qualify for grants or federal loans when it's time for your child to attend college, you will have to fill out a Free Application for Student Aid (FAFSA) form.

Not all families receive financial aid automatically. A student's eligibility is determined by a formula that takes into account the total cost of college and the expected family contribution, or EFC. The EFC is somewhat complicated, because it takes into account family income, assets, and household size, among other factors. (See also: The 10 Most Common Financial Aid Mistakes — And How To Avoid Them)

Learn about loans and their impact

It may be your plan to save for college and avoid loans entirely, but there's no guarantee you won't need them, especially if costs continue to rise. Navigating the ins and outs and pros and cons of both federal and private student loans will require some research and patience. You should seek to understand the typical interest rates on college loans, and how quickly loans must be paid back. Know that student loans can't be discharged in bankruptcy and that defaulting on loans can hurt a graduate's credit score.

It's also important to understand how student loan debt may impact a graduating student. Many recent graduates are struggling with student loan payments — the average 2017 graduate has more than $39,000 in debt — and that has an impact on everything from the jobs a graduate can afford to take, the city they can afford to live in, and the amount of other debt they end up accumulating. (See also: What to Do When You Can't Afford Your Child's College Education)

Live within your means

This may seem like such a basic piece of advice it's not worth mentioning, but it's crucial when you are trying to save for your own future as well as the college costs of a child. In an ideal world, you can save aggressively for both a child's college tuition and your own retirement, but that requires a hefty sum of cash. To achieve both goals, you must be laser-focused on keeping your spending levels low, avoiding debt, and managing budgets smartly. It may require sacrifices.

For many people, those sacrifices are worthwhile, but just be sure you know what they entail as you embark on this journey. Being prepared mentally and emotionally will help you stay on course.

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