The Type of Account You Choose Matters When Saving for College

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The best time to start saving for your child’s education was yesterday. Four years of college can add up to hundreds of thousands of dollars, and tuition prices are only getting higher. Parents who start putting away money years before their child’s first acceptance letter rolls in are already a step ahead of many American families. But simply saving isn’t enough: If the money isn’t being held in the right type of account, parents risk leaving some serious money on the table.

As Money reports, the most recent "How America Saves for College" report [PDF] from Sallie Mae shows that 61 percent of families keep that money in a general savings account, where it can accrue minimum interest. Keeping your money in a savings account is definitely better than hiding it under your mattress, but most banks don’t set interest rates for these accounts any higher than one percent. A 529 college savings plan may offer double that—or possibly even more.

529 savings plans are tax-advantaged programs that vary from state to state. If parents commit to using the savings to pay for approved college expenses, they could end up growing thousands more than they would have in a regular savings account. Additionally, any money they invest grows tax-deferred and the earnings put away for higher educational purposes can’t be taxed.

About 37 percent of parents use this method to save for college, which is a boost from the past few years. A couple of pitfalls that might turn parents away are the potential investment fees and inflexibility in terms of how the money can be spent. Whether parents decide to go with a simple savings account or something that will deliver more bang for their buck, the most important step they can take is to start saving as early as possible.

[h/t Money]

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