Savings creates choices. When it comes to college, more savings means more choices: if you can spend $25,000 annually from savings for four years, your student will have a wider range of choices than if you can only spend $10,000 annually from savings. You’ll have good choices at both of those price points, but students with more savings will (almost always) have more choices.
So what do you do if you’re just starting to save now, and your student is already in high school? You do what you can, and look for all possible ways to add to the pot. Here are a few suggestions:
- If you live in one of the 30+ states that offer a tax benefit for 529 plan contributions, target the maximum annual tax benefit for contributions and deposit the tax savings into the 529. Let’s say you live in Minnesota. The maximum deductible 529 contribution is $3,000 for a married couple. At Minnesota’s 6.875% tax rate, that $3,000 contribution would yield $206.25 in tax savings. Add $206 to your annual contribution and you might find upwards of $1,000 in extra money in the account if you start sophomore year of high school and continue contributing through the college years. And of course, that’s in addition to the contributions that you add to the account each year.
- If your student is eligible for a tax benefit for their 529 contribution, have them deposit college-targeted money they earn into their 529. (In fact, do this even if they aren’t eligible for a tax benefit.) Many students earn enough to be liable for state income taxes even if they don’t owe federal taxes; in many cases, this tax liability can be partly or fully offset through 529 contributions. Plus, you know that money that they intend to use for college is safely squirreled away where it will be available when college rolls around.
- Use a cash-back credit card and deposit the cash-back rewards into your 529. The UPromise Mastercard has an automatic 529 deposit feature and may link to your existing 529 account. In addition, it allows you to round up purchases and contribute the extra to your 529. For example, if you purchase an item that costs $9.75, UPromise would round the purchase up to $10 and contribute the $0.25 to your 529. Other cash back cards offer higher cash rewards but may or may not automatically deposit the cash back or have a more limited range of 529s for automatic deposits. For example, Fidelity offers 2% cash back if the card is linked to a Fidelity account including a Fidelity 529.
- If you have friends or family members who give birthday or holiday gifts, encourage them to contribute to your 529 in lieu of other gifts.
Perhaps most importantly, in parallel to kick-starting your savings plan, have a frank conversation with your student about what level of college costs your family’s savings and budget can support. That way they know what they’re looking for upfront and can tailor their college search to affordable choices.