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The Late-Start Guide to College Savings

Is your child hurtling toward college but you haven’t given more than a few anxious thoughts to how you’re going to pay for it? School is drawing closer and tuition projections seem to grow more outlandish by the year. Avoiding the issue won’t make it go away, and the sooner you tackle it, the better off you are. Read on for some tips.

Resist the urge to stand still: If you haven’t done anything yet, you think, why start now? Well, with compounding, a dollar saved today is much more valuable than a dollar saved 10 years from now. And even if you manage to save only a small amount between now and the time your child is ready for college, he or she is going to have to borrow that much less for tuition. The key is taking that first step.

Don’t play catch-up by chasing overly risky investments: Instead of sitting still, some parents who fear that they won’t be able to afford skyrocketing college costs might be tempted to do the opposite: swing for the fences in the hope of hitting it big. The best way to save for college isn’t to concentrate in a single risky stock or sector but instead to build a well-diversified portfolio with a stock/bond mix that suits your child’s time horizon. Bear in mind that if your child’s college years are drawing near, you’ll want to be taking fewer risks with any money you have earmarked for college, not more. While savings for children under 10 may be invested in stock funds, storing more and more of your child’s college savings in cash and bonds as they make their way through high school is sensible.

Consider a 529 plan: 529 college-savings plans can have their downsides, which include high expenses and substandard investment choices. But given that 529s permit extremely generous contributions and offer tax benefits to boot, these programs can be ideal for late-start college savers who need to sock away as much as possible in a short period of time. The key is to choose carefully.

Although Section 529 prepaid-tuition programs essentially allow you to lock in today’s tuition rates, such plans can be somewhat inflexible. If your child wants to go to school in another state, for example, some of the tuition costs may not be covered.

In contrast to the prepaid programs, money invested in Section 529 college-savings plans can be used at any college in the United States. Your contributions to a 529 plan can grow free of federal taxes, you can take tax-free withdrawals to pay for college expenses, and you may also enjoy a state-tax break. Finally, the 529 assets are held in the parents’ names, meaning that these assets receive more favorable treatment than the child’s assets in financial-aid calculations. Make sure to speak with your financial advisor/tax professional to get information on the latest rules governing 529 plans.

Cheap out: If your investment horizon is relatively short, it’s all the more important to pay attention to how much you’re shelling out in fund fees. Cash and bonds—which should form the bulk of your child’s portfolio as college draws near—have low returns to begin with. If you layer on excessive expenses, your take-home return will be that much lower. Moreover, late-start college savers should pay attention to brokerage charges and other administrative fees.

Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. Diversification does not eliminate the risk of experiencing investment losses.

 
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