5 Ways to Catch Up on College Savings | American Funds

College Savings


Crash Course: 5 Ways to Catch Up on College Savings

Are you feeling behind on college savings? You’re not alone. Fortunately, there are a number of things you can do to get on track.

It’s a classic bad dream: You arrive at school and have to take a final exam in a subject for which you’ve never cracked a book. If you have kids heading to college in a few years, you may find yourself feeling unprepared again, only now you’re wondering if you’ve saved enough to cover their education expenses.

Well, you’re not alone. The average amount saved in college funds is just $16,380, as reported in Sallie Mae’s “How America Saves for College 2016” study. That’s hardly enough to cover the average cost of four years of tuition and fees at a public college in-state ($37,640), let alone four years at a private college ($129,640), according to the website College Board.

If, like many parents, you find these totals intimidating, focus on covering partial tuition or other school-related expenses. Keep in mind that every dollar saved is one less dollar you or your student will have to borrow. Here are five steps you can take to keep from failing:

1. Prioritize

Saving, rather than borrowing, is preferable in the long term. Money that's been set aside or invested has the potential to earn interest or returns. Taking loans, on the other hand, requires you to pay interest down the line.

“Saving for college on top of retirement and all the other day-to-day expenses can feel overwhelming,” says Kris Spazafumo, senior manager of Investment Services Wealth Management at Capital Group. “However, saving is a much better deal than having to borrow to pay tuition.”

  • Re-evaluate your budget; there might be some place you can cut back. Thanks to the power of compounding, increasing your savings by even a small amount can help your college nest egg over the long term.
  • You have more time than you might think. Since tuition is paid over the course of college, you can continue saving while your child is enrolled.

2. Take Advantage of Tax-Advantaged Savings Accounts

A tax-advantaged account can help you protect your gains. The good news is that there are multiple choices, and none of them is wrong. Choose what's most practical for you, depending on your situation.

  • One of the best ways to save is a 529 college savings plan. With 529 plans, your investments grow tax-free and, depending on where you live, you might be entitled to a state tax break as well. Those tax benefits, coupled with large contribution limits, can make 529 accounts a nice fit for latecomers who want to increase their savings quickly. Our college savings calculator illustrates how consistent contributions (even small ones) can help you reach your goals.
  • Another option is a Coverdell Education Savings Account. Coverdell accounts are similar to 529 plans in that there's no federal deduction on your contributions, but amounts deposited in the account grow tax-free and distributions can be tax-free if they’re used to pay for educational expenses. Unlike 529 plans, Coverdell accounts can be used not only for college but for K-12 and beyond. However, there are income eligibility limits. The ability to contribute is phased out as your adjusted gross income increases to $110,000 for individuals ($220,000 for married couples filing jointly). Contributions are limited to $2,000 a year per beneficiary.

Getting started doesn’t have to be complicated. Arrange for automatic transfers from your checking account or payroll deductions. When you get a bonus or a raise, try to step up your giving.

3. Let Friends and Family Lend a Hand

Suggest the gift of college through contributions to a 529 plan. More than ever, family and friends are embracing this thoughtful option. Grandparents, especially, may be interested in leaving a legacy.

  • Anyone, regardless of income, can contribute to a 529 account.
  • Family members can accelerate five years’ worth of contributions into one gift of up to $75,000 ($150,000 for married couples) without gift-tax consequences.
  • Friends and family members who contribute to 529 accounts may be able to deduct contributions from their state taxes.
  • Contributions can be made via 529 gift cards, certificates and even online registries.

4. Be Practical

As your child's college years draw nearer, it’s wise to focus on more conservative investments to protect the money you’ve already saved from a potential market downturn.

  • By the time your child is in high school, you’ll likely want to shift your investments toward bonds and cash, rather than more volatile stocks.
  • Resist the urge to try to earn big returns in a short period of time. Don’t be overly aggressive in your asset allocation or focus on individual stocks or sectors.
  • Consider a target date fund within your 529 plan. These “set it and forget it” funds automatically become more conservative as your child approaches enrollment.

5. Lower the Cost of College

Tuition prices might be giving you sticker shock, but there are options that can help make college more affordable. If you haven’t already done so, give the following suggestions some serious thought:

  • Let your child assume some of the financial responsibility. The truth is, the majority of students help with costs. In fact, half of college students opted to live at home last year, while three-quarters were working while in school, according to the Sallie Mae “How America Pays for College 2017” survey.
  • Community colleges offer more affordable tuition. In some instances, it might make sense for a student to complete the general coursework at a community college before transferring to a university.
  • Go online to find out about grants and scholarships. They are offered by federal and state governments, colleges and nonprofit organizations. Do your research and be mindful of deadlines. It may well be worth your time: Scholarships and grants paid 35% of college costs last year, according to the same study by Sallie Mae. And unlike loans, grants and scholarships don't require repayment (unless your enrollment status were to somehow change).

Catching up on college savings might feel like studying for an exam at the last minute, but making the effort now could put you ahead of the class in the future. It’s not too late to work toward improving your grade.

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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.