Money

Should you be using a 529 plan to save for college? Here's what to consider

There are some holidays that make you scratch your head and wonder: Why?

This past weekend, for example, we not only marked Memorial Day, but also Learn About Composting Day, Paper Clip Day and Put A Pillow On Your Fridge Day (the last one didn't make much sense to me either — if you understand it, please tweet me @jeanchatzky).

But there was one that came through loud and clear: 529 College Savings Day, so named for May, 29 — or 529. It's meant to raise awareness about planning and saving for college with 529 plans. And it has led to celebrations of College Saving Week and College Saving Month all around the same time.

Why’s it so important to start saving for college early? Young Boozer, the state treasurer of Alabama (and yes, that's his real name) notes: “My dad used to tell me, ‘Compound interest is the eighth wonder of the world,’ and I believe that.” For that reason, it’s “never too early to start, but it's also never too late to start.”

The fact that the price of college continues to dramatically outpace inflation is another reason to get in gear. According to College Savings Plans Network, college tuition is likely to increase by eight percent every year, meaning the price of college will double every nine years.

Read More: No matter what age you are, here's how to buckle down on saving

The biggest draw of 529 savings plans is the tax-preferential treatment: Qualified contributions can grow tax-free, and withdrawals are tax free if they're used for qualified higher education expenses (which may, along with tuition, include fees, textbooks, computers and a certain amount of room and board). In some states, including Alabama, contributions are also tax-deductible on your state tax return. (To see if your state offers benefits go to savingforcollege.com.)

So whether you’re planning for your baby’s higher education expenses or your high-schooler is already touring colleges, here are three suggestions for kicking college savings into high gear.

Do your research.

Look at your in-state 529 plan first, but don’t limit yourself — you can contribute to any 529 plan nationwide depending on what’s best for you and your family (in addition to savingforcollege.com, which ranks 529 plans, Morningstar.com has helpful ratings). Use an online calculator to determine how much you might be able to save and how much you may fall short. And if you’re feeling behind, see if there are any state incentives for investing, even if it’s only a year or two before your child goes off to college.

“Indiana offers a $1,000 state tax credit for its residents,” says Brian Boswell, vice president of research and development at savingforcollege.com. “Every dollar helps. It’s always better to save than it is to borrow wherever possible.”

Take advantage of every possible resource.

There’s a wealth of information out there for savers and borrowers. In addition to the resources we've already mentioned, you may want to check out collegesavings.org as well as federal resources like studentaid.gov to shed more light on borrowing. Call whichever 529 plan you’ve chosen, and ask any questions you have.

Read More: Start your financial savings plan now with these 18 simple tips

Looking to supplement your savings and borrowing with scholarships and grants (that, unlike loans, don't have to be repaid) is also a good idea. Fastweb.com, SallieMae.com and the College Board’s search tool are helpful resources. Make sure you're tracking the application deadline of each one.

Start saving. Right now.

Remember — it’s never too soon to save. The advice most financial pros give to parents is that your retirement takes precedence over college. It's also (in my opinion) often ignored. And it's easy to understand why. It's natural to put your kids ahead of yourself. So, give them a leg up by saving for them the same way you do for yourself: Automatically.

It's not enough to just open a 529, you'll want to automatically move some money into it every single month. Start with whatever you can afford — $25, $50, $100 a month — then increase it when you get a raise, and encourage relatives to contribute for birthdays or holidays as well.

— with Hayden Field

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