How to Start Saving for College and Open a 529 Account
In order to produce the podcast and keep content up free for you, I work with partners so this post may contain affiliate links. Please read my full disclosure for more info.
Overwhelmed with trying to figure out college savings? Learn how you can quickly start and grow a 529 for your kid's college fund!
This post may contain affiliate links. Please read my full disclosure for more info.
Making College Funds Easier with CollegeBacker
CollegeBacker co-founder Abby Chao joined me as a part of a marriage and money workshop to discuss saving up for your kid's college fund.
We went over a lot of questions many couple shave in trying to figure out the best way to save.
To keep things manageable, I'm sharing the first half today on how 529s can help you stash away for your kid's college fund.
You can watch the entire workshop below or read an edited version of the highlights here.
The Challenges of Saving for College
Elle Martinez: I'm excited about this workshop how to save for your kid's college fund. We're parents of two little ones, so we know that time is an asset, especially when it comes to saving.
Abby Chao, College Backer co-founder is here to answer your questions about using 529s and how you can quickly and easily set them up.
Just to give you a little bit of background, I met Abby a few weeks ago when I was in Dallas at a personal finance conference.
I was on board with her mission at CollegeBacker to make saving college a practical option for families.
Abby, do you mind introducing CollegeBacker a little and what's it's all about?
Abby Chao: Yeah definitely. Thank you. First of all thank you so much for inviting me to come on.
So, how did we come to the idea? It really was born out of my co-founder and I am realizing that we wanted to help our friends start saving for college.
My brilliant co-founder Jordan was looking around and realized that a lot of our friends are getting to the age where they're starting to have children.
A lot of them were really stressed out about the idea of how to pay for college. The cost of college is set to double again in the next 10 years.
But at the same time, we know that a college education is so valuable and important. The data shows that college graduates will earn about a million dollars more in their lifetime and non-graduates.
We had these friends who were stressed about the idea of paying for college and wanted to find the right solution.
Some of the savvier ones even knew about the best way to save for college: a 529 college savings plan, which hopefully we will spend a good chunk of time talking about today.
Even for financially savvy ones, when we would talk to them and ask, “How much are you actually saving for college?” They would say “Well, you know, I'll get to it. I haven't had the time to sit down and figure it out. I need to do a lot of research.”
It's very understandable that they're they're busy so we just wanted to be able to help them and point them in the right direction.
The problem was that there wasn't really a good way to do that. We wanted to be able to send a gift to kickstart somebody else's fund and set them on their way.
We live in a time when we have an app for everything. It's very simple to buy stuff on Amazon or do anything from you know your phone or computer.
We even have cool you know financial products online now like Digit or Acorns. But there wasn't really a good way to make it easy to save. So we decided to build it.
Understanding 529s and How They Can Help with College
Elle Martinez: That's fantastic and I'm glad you mentioned this because I was doing some research for the workshop and a study Fidelity came up.
They had asked parents like do you want to help out with college. And I think it was like around 70 percent said they were they wanted to. That was the goal.
But when it comes to saving they only had or they would have like less than 30 percent of their goal saved.
So anything that can make it easier I think a lot of parents have great intentions but life happens.
One hurdle that I've heard with many couples is there are so many options there's this information overwhelm.
There are different kinds of accounts are out there to save for college; two popular options are 529 and Coverdell ESA.
Could give a really quick background about 529 and why parents should consider that as an option?
Abby Chao: Happy to. And it's absolutely true that there are a ton of different options out there when it comes to how to save for college.
And as a result, around 70 percent of the dollars that are saved for college are actually just sitting in checking and savings accounts!
Oftentimes people just say, ‘This is too much. I'll just put it in a checking or savings account'.
And then, of course, they lose out on the opportunity to have the amazing growth that you really need in order to keep up with the cost of college.
Let's start with a quick overview of what a 529 is and why it is such a great tool.
How 529 Accounts Work
First of all, you can think of a 529 like a Roth IRA but for college.
It's an investment account with tax advantages. You put post-tax money into the account.
The growth is entirely tax-free and the withdrawals are tax-free as long as you use them for higher education.
Withdrawals should be used for higher education but the categories are pretty expansive.
What kind of institution qualifies? Any institution that qualifies for federal financial aid. So that's in-state and out-of-state. Of course, it's undergraduate but it's also graduate.
It's also community colleges and it also includes some trade schools and also even includes schools internationally. Public and private as well.
There are a lot of different options when you choose a 529 and you can contribute more than $2,000 which is the limit for Coverdell ESA.
You can also use that money for room and board, books and supplies (even a computer).
Even if your student gets a full ride scholarship and tuition is totally covered, there are a lot of these other costs of collars that you can still use a 529.
Compared to your checking or savings account, there's the growth potential. So with checking or savings account, you might be earning 1 percent every year if you're lucky.
Meanwhile, the cost of college is generally rising at around 6 percent.
So you really want to make sure that you are investing your college savings so that you can try to keep up with the rising cost of college.
A 529 is a great way to do that with these tax benefits as well.
Making College Savings Easier
If you're looking to start saving for your kid's college fund, please check CollegeBacker out. You can open a 529 College Savings Plan in about 10 minutes.
They help you figure out the details and you can invite family and friends to help you save.
And they're offering a sweet bonus – they will match your first $25 contribution to everyone who signs up!
Grandparents asking what to get for the kids? Their contribution can count for that bonus!
Take advantage of this deal and start saving for your kid's college fun now!
Want to Save More Money?
Are you looking for more ideas on how to save more money? We offer a free week-long course – 5 Days to $5K – that takes you through how you fins, save, and make extra money on the side.
This post was originally published November 2017. Updated August 2018
