Getting started with college savings

What you should know when planning for 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 67% 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" of a college education, 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 student loans, as well as tuition discounts, grants, and scholarships, which do not need to be paid back.

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.

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 income tax-deferred. Withdrawals can be taken to pay for qualified K-12 and higher education expenses such as tuition and fees free from federal income taxes or penalties. 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 plan are considered to be assets of the donor, not the beneficiary, and thus have a lower impact on your eligibility for financial aid. Only up to about 5.6% of the 529 plan assets are included in the expected family contribution (EFC) that is calculated during the federal financial aid process, far lower than the potential 20% rate that is assessed on student assets.

    And, rather than having to choose investments yourself, 529 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 education expenses federal tax-deferred. 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) are custodial accounts that let parents (and others) make an irrevocable gift to a minor that can be used for college or any other purpose. For federal tax purposes, investment earnings are generally taxed at the minor’s tax rate, which is usually lower than the parents’.3
  • 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 early in your child's life 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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2. Ibid.
3. In 2019, for children under age of 19 (and full-time students under age 24) with no earned income (or income exceeding one-half of his or her support), usually the first $1,050 of investment income is exempt from federal income tax under the child's standard deduction, the next $1,050 is taxed at the child's rate, and the amount above $2,100 is taxed at the parents' rate.

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 one 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.

If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the beneficiary's home state offers its residents a plan with alternate state tax advantages or other state benefits such as financial aid, scholarship funds and protection from creditors.

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

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