Saving for education

As important as financial aid is, it’s only part of the picture when it comes to paying for college. As you know, you and your family are expected to come up with a big share of your college costs. Even a middle-income family may be responsible for thousands of dollars a year in college expenses.

Fortunately, certain types of college investment plans are designed specifically to help you and your parents set aside money for your education. Some of these programs work by exempting any earnings from income taxes, which means that taxes are never due if you use the money for qualified education expenses. The fact that no tax is due means the money in the accounts has the potential to grow more quickly.

There’s another good reason to use these special types of college savings plans. Tuition at most colleges and universities has risen anywhere from 5% to 13% every year since 1980, while inflation — or the “cost of living” — has only grown an average of 3% annually in that time. So it’s especially important to put money aside for your education where it has the best chance of growing more quickly.

One thing to remember is that the money in these types of accounts must be explained on your financial aid forms, or FAFSA, that you file with the federal government. But that’s just the government’s way of making sure that your family contributes the appropriate amount to your college education.

Chances are, if you’re ready for college but you or your parents haven’t started saving by now, your money won’t have time to grow very much when you need it for school expenses. But these college-savings programs aren’t just about you. If you’re already thinking about starting your own family — or in fact have started — it’s smart to save for your children’s college too. The earlier you start contributing to college investment plans, the more money you’re likely to have when it’s time to send your own kids off to school.