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Getting started with college savings

What you should know when planning for future college education expenses.

  • By Fidelity Learning Center
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There is no denying the fact that a college degree is a major financial investment. But studies have consistently shown that a college education pays off in the long run for most people, as college graduates earn higher salaries and experience lower levels of unemployment.

According to the College Board, over the course of a 40-year career of full-time work, bachelor's degree recipients have median earnings that are 65% higher than the median earnings of high school graduates.1 In addition, the College Board reports that the unemployment rate for individuals with at least a bachelor’s degree has consistently been about half the unemployment rate for high school graduates.2

It's also important to note that despite the high "sticker price," financial aid from federal and state sources, as well as from colleges and universities, helps to reduce the price many students pay. Financial aid may include tuition discounts, grants, and scholarships, which do not need to be paid back, as well as student loans.

To help increase your child's odds of graduating college without any student loan debt, you may want to consider getting an early start on saving for college. Any amount you can save will help reduce the amount of money you or your children may need to borrow to pay for college in the future.

According to Fidelity’s 2014 College Savings Indicator Study, the number one piece of advice parents give when it comes to saving for college is to start saving as early as you can. Your college savings will also help expand the number of options available to your child when it comes time to selecting a college.

Here's what you need to know to get started with saving for college:

1. Understand the potential costs of different colleges

You and your child may already have a certain college in mind, especially if your child is already in high school. One of the first steps in making a choice is to visit college websites to find out what it will cost to attend. In addition to the published price of attending, be sure to check the “net price,” which is the cost of attending a college after accounting for grants and any available tuition discounts. Many colleges offer a "net price calculator" on their website that enables you to estimate costs for your family, based on your personal financial situation. If you can't find it, simply type “net price calculator” in the search bar on the college’s web site.

2. Decide which type of college savings account is best for you

A dedicated college savings account can help you stay on track toward meeting your college savings goals. Depending on the type of account you choose, it may also help reduce or eliminate taxes on your investment gains. There are several types of savings accounts from which to choose, including:

  • 529 College Saving Plans: Any earnings on contributions made to a 529 plan grow federal tax-deferred. Withdrawals taken to pay for qualified higher education expenses such as tuition, fees, and room and board are also free from federal income taxes. Many states sweeten the deal by providing additional tax benefits to residents who invest in their home state’s 529 plan. Assets held in a 529 College Savings Plan are considered to be assets of the donor, not the beneficiary, and thus have a lower impact on your eligibility for financial aid. And, rather than having to choose investments yourself, 529 College Savings Plans offer professionally managed investment portfolios.
  • Coverdell Education Savings Account (ESA): These accounts also allow you to save for college and withdraw money for qualified higher education expenses federal tax-deferred. In addition, your savings can be used to pay for qualified expenses at private elementary and secondary schools, a feature that is not available with 529 College Saving Plans. However, the annual contribution limit for Coverdell ESAs is just $2,000 per beneficiary and higher income households may not be eligible.
  • Custodial Accounts: Uniform Gift to Minor Accounts (UGMA) and a Uniform Transfer to Minor Accounts (UTMA) allow parents (and others) to earmark money for college savings by making an irrevocable gift to a minor. At least part of the investment earnings may be exempt from federal income tax, and some or all may be taxed at the child’s generally lower tax rate. However, once your child reaches the age of majority, control of the assets transfers to the beneficiary. Therefore, he or she could access these funds for any purpose.
  • Taxable Savings Accounts or Brokerage Accounts: You can also save for college in a traditional savings account or brokerage account. While these accounts are a convenient option, any earnings will be taxed at either the parents' federal and state tax rates or the child's tax rate, depending on whose name is on the account registration.

3. Invest early and often

Getting an early start will allow more time for your investments to potentially grow, so the sooner you can start saving the better. You may also want to get in the habit of making monthly contributions by setting up a direct deposit from your checking, savings, or brokerage account to your college saving account. The easier you make it to save, the less likely you may be tempted to skip a contribution.

Establishing a college savings goal, choosing the type of account that's best for you, and making regular contributions starting at an early age can help you meet future college education expenses. While you or your children may still need to borrow money to cover some of your college expenses, any savings you accrue will help reduce that amount. Grants, scholarships, and tuition discounts may also help reduce your out-of-pocket expenses.

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Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Please carefully consider the Plan's investment objectives, risks, charges and expenses before investing.  For this and other information on any 529 College Savings Plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view online.  Read it carefully before you invest or send money.

The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan are offered by the State of New Hampshire, MEFA, the State of Delaware and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments.

The UNIQUE College Investing Plan is offered by the State of New Hampshire and managed by Fidelity Investments.  If you or the designated beneficiary are not a New Hampshire resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.

Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.

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Related Lessons

Get Started With College Savings

  • Saving for college

    Get the information you need to plan for your child’s educational future. Compare your options, see how much you’ll need to save, and find an account that meets your needs.

  • 529 College Savings Plans

    529 plans are flexible, tax-advantaged accounts designed specifically for college savings. Invest in any state’s plan, and use the funds at most accredited schools nationwide.