MONEY college savings

The Earnings on Your 529 College Savings Account Stink. Here’s Why That’s OK

dollar bill shoved in pile of books
Mudretsov Oleksandr—iStock

It's not all bad news.

The average investor in a college savings plan made just about 4% last year, even though the total U.S. stock market rose by almost 14%, a new study from Morningstar found.

But the lead author of the report, Leo Acheson, says that performance may not be quite as depressing as it sounds, for these six reasons:

  • It still beats tuition: Although 4% severely lags the Standard & Poor’s 500, it beat tuition inflation, which rose by 3.7% in 2014, according to the College Board.
  • Older students should earn less: A disproportionately large percentage of all 529 assets are funds that have been saved over time for students who are now at or nearing college age. Funds for those students should be—and typically are—invested very conservatively. Savings plans designed for current college students, for example, are typically almost entirely in safe bonds, which means they are earning less than 2% a year right now, Acheson notes.
  • Diversification setbacks should be short-term: Younger and more aggressive investors whose portfolios were globally diversified also earned less than the Standard & Poor’s 500 in 2014 because of trouble in international markets. Overall, emerging markets funds lost about 5% in 2014, for example. But, in theory, at least, globally diversified portfolios should do better over the long run.
  • Savers get federal tax benefits: When parents take the money out of 529 accounts to pay college bills, they don’t have to pay taxes on the gains, which boosts their effective return. Morningstar estimated that a family in the 25% to 35% tax bracket that saved $2,400 annually over the last five years would have netted $15,275 after taxes in a typical mutual fund, but $15,628 after taxes from the same investment in a sheltered 529 account.
  • Some also get state tax benefits: About half of Americans live in one of the 34 states that give deductions or credits on state tax returns for contributions to 529 plans. Those initial tax breaks reduce families’ state tax bills by an average of 8.7% of the contribution, according to Morningstar. (See if you live in a state with a 529 tax break.)
  • Fees are shrinking: One of the biggest criticisms of 529 plans has been the high fees that eat away at parents’ investment returns. Morningstar found that, for example, large value index funds offered in 529 plans charge expense ratios of .78% of assets, while the equivalent mutual fund outside of 529 plans charges just .56%. But 40 plans cut their fees in 2014, bringing the average gap between mutual funds and similar 529 plans down by more than half, Acheson found. In addition, the best plans, recommended by MONEY and by Morningstar, have fees as low as .08%.

The bottom line of all of these developments, Acheson says, is that for families in moderate to high tax brackets, and those who live in a state with a 529 tax break, “it makes sense to save for college in a 529 plan…especially one with low fees.”

MONEY college savings

Six Misconceptions That Are Costing You Free Money for College

college students listening to professor in lecture hall
Getty Images

In honor of 5/29 College Savings Day, MONEY answers parents' most common questions and concerns about 529 accounts.

Despite being promoted for more than a decade as the best way to save for college, 529 plans are a mystery to almost two-thirds of American families. Which means they’re losing out on what is essentially free money for college.

Part of the problem, of course, is that many Americans feel they don’t have any extra money to save for any reason, college included, one recent survey found.

But today—5/29 (get it?)—is a great day to take a closer look at how these college savings plans work. For one thing, so-called “529 Day” comes with cash bonuses. Many hospitals, for example, will give babies born on this day $529 toward college savings. The state of California will kick in $50 in matching contributions made to its 529 accounts today. And Virginia is giving anyone who opens a new college savings account this month a chance to win $10,000.

These short-term promotions are designed to draw attention to the more permanent advantages of the 529 plan. Thirty-four states offer state tax breaks or scholarships to residents who invest in college savings accounts that add, on average, the equivalent of 8.7% to your contributions. And earnings on any 529 investment can be used tax-free to pay for your child’s college expenses, which boosts the net value of your college savings over what you would earn in a regular investment account.

Unfortunately, many parents who can afford to save don’t do so, often because they have misconceptions about the costs and benefits of 529 plans. Here’s the truth behind six of the most common false assumptions that experts say they hear.

It will impact financial aid. Some parents who have saved for college fear that their nest egg could turn into a financial hand grenade when their student applies for financial aid, says Lynn O’Shaughnessy, author of The College Solution. And, in fact, every $1,000 you’ve saved in a college savings account can reduce need-based aid offers by up to $56. But many families don’t see that much of a reduction. And even those who do are still wealthier and far more able to pay for college than they would have been without saving, O’Shaughnessy says.

I can’t afford the contribution minimums: A lot of families get paralyzed by the idea that they can’t put a large sum aside, and so they don’t save anything at all, says Betty Lochner, Director of the Guaranteed Education Tuition plan in the state of Washington. “They think it’s too steep a hill to climb, and it’s not,” she says. At least 33 states allow you to open accounts with deposits of $25 or less, according to the College Savings Plans Network’s tool to compare plans.

The investments are too risky. Many parents are naturally afraid to put money in investments they don’t understand or trust. But most states offer low-cost, professionally managed plans specifically designed for parents who don’t want to have to worry about the ups and downs of the market, says Joe Hurley, an expert on 529 plans and founder of Savingforcollege.com. For example, the increasingly popular age-based portfolios, many of which are managed by well-respected firms such as Vanguard, Fidelity, or T. Rowe Price, will manage the risk of stock markets by moving money to more conservative portfolios as students get closer to college age.

There are also several independent guides to help you pick a good plan. Savingforcollege.com compiles a quarterly list of the top performing plans, and Morningstar publishes an annual research analysis.

It limits college choices: Although most 529 plans are sponsored by a state, the funds can be used at any accredited college in any state, says Lochner, who is also chairwoman of the College Savings Plans Network, a consortium of state plan administrators.

But my kid’s going to get a full ride! Time for a reality check: The idea that bright students can easily earn full-ride scholarships is a myth, says O’Shaughnessy. Only .3% — that’s less than one third of 1% — of college students receive true full rides, according to research by Mark Kantrowitz, publisher of Edvisors and author of “Secrets to Winning a Scholarship.” Even if your child gets a scholarship to cover tuition, there’s still room and board and books to pay for, both of which qualify as educational expenses for 529 accounts. (Congress is considering a proposal that would expand what qualifies to include computers, software, and internet access.)

Any additional money left over in a 529 can be easily transferred to a college savings account for yourself, or for a sibling, cousin, or future grandchild. Alternatively, you can withdraw 529 money from an account and spend it on anything you want—you’ll just have to pay taxes on the gains (as you would have done for funds from a regular investment account), and there will be a 10% additional tax penalty on those gains. If you are spending money left over in a 529 because your child won scholarships, however, the tax penalty is waived, Lochner says.

My kid will blow the money on video games. Having a nightmare about your daughter going through a rebellious teenage phase and cashing out the college savings plan to finance a backpacking trip across Europe? Not going to happen. Parents remain in control of the account even after a child turns 18.

To learn more about 529 plans and get help figuring out which 529 plan is right for you, check out MONEY’s guide.

MONEY College

How Parents Feel About Affording College: Pick a Synonym for Scared

Survey finds most parents fail to put their college savings in investments that can keep up with tuition.

How do parents feel about saving for college? How many different words are there for anxious?

In a survey of 1,988 parents released today, the majority of parents described saving for college with words like “worried,” “frustrated,” and “overwhelmed.”

In the 2015 “How America Saves for College” report from Upromise by Sallie Mae, parents reported saving less for everything—including college—in 2014 than they did in 2013. The reason cited by most (61%): they just don’t have enough money left over at the end of the month.

The average annual amount put aside for college in 2014 fell to $2,566 from $3,016 in 2013. The average accumulated college savings also declined, to $10,040 from $13,408.

That said, the survey found that parents are still putting a high priority on their children’s education, continuing to earmark around 10% of their savings for college. But along with saving fewer actual dollars, many are putting what money they have in low-paying investments that will likely lag tuition inflation. Nearly a quarter said they were saving in their checking accounts, and 15% said they were socking away college money in CDs, both of which currently pay almost no interest.

Fewer than 30% of parents said they used tax-advantaged 529 college savings plans; worse still, fully 52% of those surveyed said they’d never heard of a 529 plan and thus didn’t know that they could put money aside for college and let it grow tax-free, and might even get get a state tax break on their contributions to their kids’ accounts.

Not surprisingly, parents with low and moderate incomes reported being the most worried. But even parents earning more than $100,000 a year, who were the biggest savers, were still plenty fretful. Only 30% of the wealthy described themselves as “confident” in their ability to pay for college.

The wealthy were the most likely to take advantage of the tax benefits provided by 529s: Almost half of families earning more than $100,000 reported using a 529 plan, compared with 20% of those earning between $35,000 and $100,000 and 17% of those earning less than $35,000. (For help feeling a little less anxious, here’s advice on choosing the best 529 plan for you.)

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MONEY Taxes

How To Make the Most of the Single Best College Tax Break

College campus
Andersen Ross—Getty Images This scene can save you money on your taxes.

Nearly 2 million Americans pay too much in taxes because of confusion over education benefits. Here's how to avoid that mistake.

Back in January President Obama proposed consolidating many overlapping education tax benefits, a plan that appears long dead. Too bad, since millions of taxpayers make mistakes writing off education expenses on their 1040s and pay hundreds in unnecessary taxes as a result.

A 2012 Government Accountability Office report found that education tax breaks were so complicated and poorly understood that 1.5 million families who were eligible for one failed to claim it and overpaid their taxes by more than $450 a year. Another 275,000 families were so confused that they opted for the wrong benefit and overpaid by an average of $284.

Here’s how to get college tax breaks right on this year’s return and beyond.

Stick With The Winner

In any given year, you’re allowed to claim only one of these three tuition tax benefits: The tuition and fees deduction, the lifetime learning credit or the American Opportunity Tax Credit (AOTC).

Don’t be distracted by all the options. The AOTC is the most lucrative and broadest education tax benefit available, and it should be your first choice, says Gary Carpenter, a CPA who is executive director of the National College Advocacy Group.

The AOTC, available to a student for up to four years, cuts your federal taxes dollar-for-dollar. You can take the credit for up to $2,000 in tuition or fees, and 25% of another $2,000 of qualified expenses, for a total max of $2,500. Married couples with adjusted gross incomes of up to $180,000, or $90,000 for single filers, are eligible to claim the AOTC.

Even if you owe no federal income taxes, you can get a refund check for up to $1,000 by claiming the AOTC.

Maximize Your Benefit

Now that you know that the AOTC is tops, you need to know how to get the full benefit on the maximum $4,000 in eligible expenses, which can be complicated in these four situations.

1. You have a super generous financial aid package: Did your little genius get such a big scholarship that you’ll pay less than $4,000 for tuition, fees, and books? Once you’re done celebrating, call the scholarship provider and ask if you can use some of that money to pay for room and board instead, advises Alison Flores, principal tax research analyst with The Tax Institute at H&R Block.

This may seem odd, since scholarships are tax-free only if you use the money for tuition and fees. But by shifting some of the aid so that you pay $4,000 worth of tuition, fees, or book costs out of your own pocket, you can get the maximum benefit from the AOTC. That $2,500 credit typically outweighs whatever additional taxes you’d have to pay on a re-allocated scholarship, says Flores.

2. Your tuition payments are low: One way students attending low-tuition colleges can make sure they get the full advantage of the AOTC is by paying a full academic year’s tuition by Dec. 31, instead of waiting until the start of the second semester in January to pay that semester’s bills.

3. You’ve saved in a 529 plan: You can claim the AOTC only for tuition that you paid for with taxable savings, notes the NCAG’s Carpenter. When you take money from a 529 college savings plan to pay your tuition, that withdrawal is tax-free. So there’s no double dipping. You can’t also claim the AOTC for those funds.

Assuming you don’t have enough in the 529 plan to pay the entire annual tuition, room and board bill (and who does?), earmark the 529 withdrawal for room and board, and pay at least $4,000 in tuition with taxable savings.

4. You’re taking out large loans. If you’re using loans to cover tuition, you can use the money you borrowed to claim the AOTC. If you and your spouse report a joint income of less than $160,000, you can also deduct the interest on your payments.

Parents can deduct the interest on loans they take out for their children’s education, but not on payments they voluntarily make on the student’s loans, Flores notes.

Take Care With the Paperwork

Once you’ve done everything else right, don’t lose a tax break at filing time. For that, you need to keep good records.

Colleges typically don’t report all the information you need to claim all of your education tax breaks on the 1098-T forms they send out each year. They usually provide only the amount they’ve billed you, explains Anne Gross, vice president of regulatory affairs for the National Association of College and University Business Officers (NACUBO).

To get all of the tax goodies, you’ll have to show the IRS how much you paid, and where the money came from. Some colleges will allow you to gather that information from their online accounts portal, Gross says. But as a backup, it’s smart to keep your own records.

Shift Gears as a Super Senior or Grad Student

Once you’ve used up a student’s four years of eligibility for the AOTC, try for some of the smaller, more limited education tax breaks. If you earn less than $128,000 as a married couple, switch to claiming the lifetime learning credit starting in year five of your dependent student’s higher education. There is no limit to the number of years you can receive this credit of up to $2,000.

If you make between $128,000 and $160,000, you can write off up to $4,000 from your income using the tuition and fees deduction.

Keep Cutting Your Taxes Post-Graduation

When school is finally over, the tax breaks don’t end. Singles earning less than $80,000 and couples earning less than $160,000 can deduct up to $2,500 a year in student loan interest. Parents with federal PLUS loans can claim their interest payments on this deduction. But parents who are voluntarily making payments on their children’s student loans cannot claim that interest.

Catch a Break When You Save Too

Finally, President Obama’s plan to eliminate tax-free withdrawals from 529 college savings plan has been squashed as well, preserving the tax benefits on the money you’ve set aside for your, your children’s, or your grandchildren’s college costs. Although contributions to a 529 are not deductible on your federal income tax return, the earnings grow tax-free. And as long as you spend the money on qualified college expenses, withdrawals are tax-free as well.

What’s more, 32 states give you a break on your state taxes for your 529 contributions (or, in New Jersey’s case, a scholarship). These benefits are worth exploiting: A Morningstar report found that, on average, they equate to a first-year boost on your investment returns of 6%. Check this map to see if you live in a state that rewards college savers.

MONEY College

Don’t Be Too Generous With College Money: One Financial Adviser’s Story

When torn between paying for a child's education or saving for retirement, parents should save for themselves. Here's why.

Saving money isn’t as easy — or as straightforward — as it used to be. Often, people find they have to delay retirement and work longer to reach their financial goals. In fact, one of the most common issues parents face these days is how to save for both retirement and a child’s college fund.

Last month, for example, I met with a couple who wanted to open college savings funds for each of their three children. They were already contributing the maximums to their 401(k)s with employer matches. I applauded their financial foresight; it’s great to see people thinking ahead.

Then I gave them my honest, professional opinion: Putting a lot of money into college funds isn’t going to help if their retirement savings suffer as a result. Sure, they’ll have an easier time paying tuition in the short term, but down the road their kids may end up having to support them — right when they should be saving for their own retirement.

The tug-of-war between clients’ retirement and their children’s education can lead to difficult conversations with clients, and difficult conversations between clients and their children. Who wants to deprive their children of their dreams and of their top-choice school?

I try to be matter-of-fact with my clients about this sensitive subject. I start with data: If you have x amount of money and you need to put y amount away for your own retirement, you only have z amount left over for your children’s college.

I also talk a little about my own experience — how my parents were able to write a check for my college tuition. But college was less expensive then, and costs were a much smaller percentage of their salary than they would be today. Times have changed.

As much as we all want to be friends with our children, we have to put that aside. I tell people that if they don’t know whether they should put their money in a 529 account or their retirement account, they should put it in their retirement account. Financial planners commonly point out that you can get a loan for college but you can’t get one for retirement.

I don’t think people realize that. I think that they just want to do right by their children.

After I talk about my own experience, I move on to my recommendation. I tell clients that one way to approach this issue with their children is to make them partners in this venture. Tell them that you’re going to pay a portion of the cost of education. Set a budget for what you can afford, then work with them to find a way to fill in the gaps. Make a commitment, then stick to it.

I explain to my clients that choosing their retirement doesn’t mean that they can’t help your children financially and it doesn’t mean they are being a bad parent or are being selfish. It does mean that they should prioritize saving for retirement.

When clients tell me that they feel guilty for putting their retirement first, I ask them this: “Where is the benefit in saving for your children’s college but not for your own retirement?” Without a substantial nest egg, I tell them, you could end up being a burden on your children when you’re older.

And there’s an added bonus, I tell them: If your kids see you putting your retirement first, it might teach them about the importance of saving for their own retirement. That could end up being the best payoff of all.

Read Next: Don’t Save for College If It Means Wrecking Your Retirement

———-

Sally Brandon is vice president of client services for Rebalance IRA, a retirement-focused investment advisory firm with almost $250 million of assets under management. In this role, she manages a wide range of retirement investing needs for over 350 clients. Sally earned her BA from UCLA and an MBA from USC.

MONEY First-Time Dad

How to Avoid Spoiling Your Child

Luke Tepper
One-year-old Luke, having his cake and eating it too

First-time dad Taylor Tepper learns how not to be the kind of parent he fears becoming.

Our son, Luke, recently celebrated his first birthday. Family and friends generously gave the tyke rubber soccer balls, race cars, pegs, hammers, marbles, and chic winter gear. Luke now has more toggle coats than I do.

Luke’s things, like a rebel army, have begun to outnumber my own. He now has nearly a dozen bins filled with plastic and wooden products crafted by large companies and bought by suckers like me. His clothes occupy a spacious three-drawer dresser, while mine are packed tightly in a small closet. He has twice as many pairs of socks as I do. This all feels silly. Give Luke the option to play with an empty milk carton or a fluffy stuffed animal, and he’ll be shaking the carton between his hands like a boy possessed before you can blink. The box carries more value than the toy inside.

As I cleaned up after Luke’s party, I started thinking about the nature of toddlers and their stuff, and I’ve been mulling over a few issues ever since. The first has to do with spoiling. I know that you can’t really spoil a baby—infants’ needs must be met. But am I developing habits of indulgence now that will ossify over time and lead me to spoil Luke when he’s older? Am I setting myself up to be a bad parent? The second issue has to do with the presents themselves, the catalyst of my spoiling concern: there must be a better use for all that money.

The truth about spoiling

On the first question, the experts are clear. “You’re not going to spoil a baby,” says Tovah P. Klein, assistant professor of psychology at Barnard College and author of How Toddlers Thrive. “They need to be comforted and cared for.”

That Mrs. Tepper and I do. We also warm Luke’s baby wipes, pull him around in a red wagon for hours on end, and turn on “Sesame Street” whenever he’s systematically broken us down. My fear is that our good-natured, responsive parenting will morph into something more unseemly as he ages. It’s not a big leap to image a world where I’m cooking a second dinner because 2-year-old Luke is dissatisfied with the first. I shudder when scenes like that unfold in my mind’s eye.

The key thing for me to recognize, says Klein, is that I don’t need to protect my son from unhappiness.

“If you think, my role is to make him happy all the time, or to entertain him, the child doesn’t learn how to handle hard times, like when he’s angry or frustrated or sad,” Klein says. “Your goal as parents is, how do you help him deal with anger when limits are imposed.”

That’s an intuitive point, but one slightly difficult to reconcile with experience. Luke is our first child, so everything is new to us. Call it the Unbearable Lightness of Parenting. So in the next five to 12 months, as he develops a sense of self and forms his own ideas of what he wants, it will be challenging to hold a firm line. How do I know this tantrum isn’t just a test of limits but a true expression of real pain? Will I have the stomach to stay the course?

“He’ll be happy if you love him and let him know you’re there,” Klein told me. “Put up some reasonable limits and help him through those frustrating moments. That is what counters spoiling.”

Children, especially really young ones, crave structure. It’s the lack of it that results in insecurity. So if he doesn’t want to eat what I’ve cooked for dinner, fine. But I’m not frying up another meal.

Getting presents—and other stuff—under control

Limits are certainly in order for all of his toys. Between Christmas and his birthday and well-meaning friends doting on the little guy, we have enough Elmos and plastic cell phones and wooden school buses to open up our own boutique. This overflow of generosity leads to a short-term concern as well as a longer-term one.

In the here and now, the problem is sheer volume. “Children need less material goods,” says Klein. “More stuff tends to overstimulate them.” We already try to highlight only a few options for him to play with, but we’ll resolve to be even more selective going forward. We’ll offer him one bin to tear apart rather than two.

Later on, though, I worry about relying on toys (and ice cream and other objects that cost money) as a means of reinforcement. I don’t want to get into the habit of giving him things all the time so that he’ll do X or Y. Plus, I don’t think I’ll be able to afford it.

“Not every reward has to be a material reward,” says psychologist and parenting expert Lawrence Balter. “Sometimes rewards can be privileges as they get older.”

I was discussing the issue of presents at Luke’s party with a friend from college, and she asked me if we had starting saving for his college fund. (We started a 529, but it’s tragically underfunded.) Instead of toys, she asked, why don’t you ask people to donate to the fund instead?

Which is what we’re going to do from now on. Rather than stuff our bins full of perfectly fine but ultimately useless things, we’ll ask friends and family to chip in to help pay for his insanely expensive education. While that might make the act of gift-giving a little less fun for them, it will help us afford an essential good that will dramatically improve his life.

Plus, it’s one less spaceship for me to trip on in the middle of the night.

More From the First-Time Dad:

MONEY College

My Son Isn’t Going to College. Now What?

College savings seemed to go according to plan, but now the beneficiary has strayed from the script, and the parent is worried he'll get the funds.

Q. My son is turning 18 and I’ve saved more than $200,000 for him for college. He doesn’t want to go. Some of the money is in UTMAs, some in a 529 Plan and some in savings bonds. I don’t want him to live off the money and not get a job. Help!

A. Bet that threw you for a loop.

Each of the kinds of assets you saved for your son is treated a bit differently, so let’s take stock of what you have.

Custodial Accounts

The assets you saved in a custodial account — Uniform Transfer to Minor Act accounts, or UTMAs — will be his when he reaches the age of majority, said Bryan Smalley, a certified financial planner with RegentAtlantic Capital in Morristown.

In New Jersey, the age of majority is 21. That means that there are three more years before the assets officially become your son’s.

“A lot can happen in the next three years: your son could start a career and be self-sufficient — therefore not needing the money to support his lifestyle — he could start his own company and use the UTMA funds to help grow the business, or he could end up deciding to go the college,” Smalley said. “Who knows, a few years of earning minimum wage and seeing all of his friends move on with their lives may be all the motivation he needs to hit the books once again.”

The 529 Plan

The 529 account is different. As long as you’re the owner of the account, you retain control of the funds and there is no time limit on when you need to use them,” Smalley said.

If your son decides to go to college in a year or two, the funds will be there.

“If your son does not go to college, you can always use the funds for another of your children’s college education — if your son is not an only child — or hold onto the account and use it for a future grandchild’s college education,” Smalley said.

Savings Bonds Earmarked for College

If either of those options are not of interest to you, you can always withdraw the funds from the 529 account and use them elsewhere, Smalley said. But that move comes with a price. You’ll have to pay a 10% penalty plus taxes on the earnings in the account if you use the funds for anything other than qualified higher education expenses.

On your savings bonds — assuming they are either EE or I bonds — if they are owned in your name, your son does not have a right to them even though they were purchased with the intent to pay for his college education, Smalley said. You may continue to hold onto them or cash them in.

“Please note that if they are not used to pay for higher education expenses the interest on the bonds is not deductible on your tax return,” Smalley said.

If you purchased bonds in the name of your son, you can have them reissued in your name. The caveat here is that you cannot have them reissued if they were purchased with your son’s own money, such as with money from an UTMA.

“As you can see, not all is lost. While it must be disappointing that your son does not want to go to college now, it is not an irrevocable decision,” Smalley said. “He could always change his mind and go later or perhaps he finds his success on a path that does not travel through a college education.”

More from Credit.com

This article originally appeared on Credit.com.

MONEY Ask the Expert

This Formula Can Help You Figure Out How Much to Save for College

Ask the Expert - Family Finance illustration
Robert A. Di Ieso, Jr.

Q: “My husband and I have been saving for our kids’ college since they were born. They are now 4 and 6. Our initial plan was to just throw what we could into a savings account, then we moved that money to a 529. We make small monthly contributions, and also contribute some money whenever we get a bonus or they get a birthday gift from grandparents. However, we still don’t have a number in mind for what we actually need by the time they start school. How much should we be saving for them each month?” —Ryan Phelan

A: Congratulations for starting the saving process early and taking full advantage of compounding in that 529 account. That’s less money you’ll have to borrow later.

Now for the bad news: By the time your eldest child enters college, four years at an in-state public school will cost an average $130,000 and a private-school education will run $235,000 if prices continue rising at the rate they have for the last five years.

Footing the full freight will be unrealistic for most folks, especially those like you who have more than one child to put through school. Besides, you should also be saving for your own retirement—since you can’t fund that stage of life with loans as you can your kid’s education.

Mark Kantrowitz, author of Filing the FAFSA and senior vice president of the Edvisors Network, offers a more reasonable goal: Try to save a third of your kids’ expected college costs by the time they’re on campus. The next third can come from income (plus grants and scholarships) at the time tuition needs to be paid, and the final third you or your kid can borrow.

The idea is to spread the cost out over time to make that staggering price tag more manageable, says Kantrowitz. You’re putting together past income (what you’ve saved), current income (while the child is in school), and future income (yours or your child’s to pay back the loans).

So in your situation, a good goal would be to put away at least $43,000 or $78,000 for your eldest child, depending on whether you’re aiming to pay for public or private school.

You can estimate a savings number for your younger child—and anyone else can figure it out for their own kid—by figuring out the full cost of an average college education the year the child was born, since college costs increase by about a factor of three over any 17-year period, says Kantrowitz.

For help translating the big number into what you need to save each month—based on your state, income, children’s ages, and current 529 savings—use this 529 college savings planner tool from Savingforcollege.com.

More from Money 101:

Where should I save for college?

How much should I save for college vs. retirement?

What’s the best 529 plan for me?

MONEY College

How College Costs Will Change in 2015

Although college costs are still increasing, they're increasing at a much lower rate than they have in recent years. Interest rates and repayment for federal loans have eased as well.

MONEY College

How to Give the Gift of College This Holiday Season

stacks of money wrapped with a gold bow
Deborah Albers—Getty Images

The kids in your family could probably use cash towards school more than a new toy (or at least parents might prefer that). Here's how to make it happen.

Saving for college can be tough, but many families do not tap a potentially generous resource: relatives and friends.

Various companies are trying to change that by making it easier for parents to ask for, and receive, contributions to college savings plans. As the holidays approach, these providers are stepping up their efforts to publicize these options and convince families to try them.

“I think people can feel comfortable going out and saying they prefer gifts that are more meaningful,” says Erin Condon, vice president of Upromise, a college savings and cash rewards program, run by Sallie Mae.

“They can say, ‘Instead of giving our son a truck, how about helping us save for college? Or giving him a smaller truck and putting $20 into his college savings plan?'”

Named after Section 529 of the Internal Revenue Code, 529 college savings plans allow contributors to invest money that can grow tax-free to pay for qualified higher education costs.

Although typically sponsored by states, the plans are run by investment companies and account balances can be spent at any accredited college or vocational school nationwide.

Upromise released a survey last week that found seven out of 10 parents would prefer their children received money for college rather than physical gifts. Upromise offers a way to let others do just that: it is called Ugift, a free online service that families can use to solicit their social networks for college contributions.

Friends and family are emailed bar-coded coupons they can print out and send in with a paper check. The service is available to customers of the 29 Upromise-affiliated 529 plans, which include two of the country’s largest: New York’s 529 College Savings Program and Vanguard 529 College Savings Plan in Nevada.

Upromise has found that customers who enlist others to help them save via the site’s rewards program and shopping portal typically accumulate three times as much as customers who do not, Condon says.

The 529 plans run by Fidelity Investments also offer a free service that allows parents to set up a personalized contribution page and share links via email or social media that allow direct contributions to a child’s college savings account via electronic check.

Fidelity released its own poll recently, which found 9 out of 10 grandparents surveyed said they would be likely—if asked—to contribute to a college savings fund in lieu of other gifts for a holiday, birthday or special occasion. Fidelity manages 529 plans for Arizona, Delaware, Massachusetts, and New Hampshire.

These programs tap into the crowd-funding zeitgeist that has seen people appealing to their social networks to help pay for creative projects, charitable causes as well as personal costs such as medical expenses, travel and weddings.

As college costs rise, more people see the need for such help, according to Joe Hurley, founder of the 529 information site SavingForCollege.com.

“It’s a reaction to material gifts, and also the rising cost of college that’s creating so much anxiety for parents,” says Hurley.

Create a College Registry

A few sites facilitate contributions to any 529 plan. GradSave, for example, lets parents set up a free college savings registry that accepts contributions from friends and family. The money is held in an FDIC-insured account until the parents transfer it to their 529 accounts.

Leaf College Savings, meanwhile, offers an education gift card that anyone can use to make a 529 contribution for someone else. The giver loads an amount between $25 and $1,000 onto the card and gives it to the parent, who can then redeem it at the Leaf site and transfer the funds to his or her 529 plan. If the parents do not have a plan, the site helps them set one up.

The gift card, however, comes with an “activation fee” of at least $2.95 plus another $2.95 to get a physical card rather than one sent by email or Facebook or printed out on your computer.

But givers do not need an intermediary to contribute to a college savings plan, says Hurley, since virtually every 529 plan accepts third-party gifts. Those who want to contribute directly to a child’s account typically will need to include the account number and perhaps the child’s Social Security number, but Hurley notes there is a way to bypass that requirement.

“Just make the check out to the 529 plan, hand it to the parents and say, ‘Here, put it into the plan,'” he says. “That’s pretty easy.”

One thing that may not be easy is figuring out who gets the tax break for the gift. Most states offer tax deductions for 529 contributions when the contributor is a parent. Some offer the break to any contributor. And some do not offer any tax break at all.

The solution? Talk to your tax professional.

Related: More on college savings plans

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