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Saving for College Adds Up

Starting early and contributing regularly can help you prepare for future costs.

f you're hoping to assist your child with paying for college, getting an early start on your savings can make a significant difference. And putting that money in a tax-deferred account, such as a 529 college savings plan, may increase the growth potential of your assets.

  • Even small contributions can have a significant impact on your savings goal, especially if they're made early.
  • The longer you allow compounding to work, the more your total balance may be derived from potential earnings rather than contributions.
  • The more you save, the less you'll have to borrow to pay for collegeeven if you think you'll qualify for financial aid, a large portion generally comes in the form of loans.

Establishing an automatic savings strategy can help ensure that you make contributions even when your goal is in the distant future. After all, your initial contributions have greater potential to generate the most return, thanks to the effects of compounding.

Benefit From an Early Start

The sooner you begin saving, the less money you'll need to set aside to reach your goal. For example, if you expect to pay about $20,000 each year toward your child's college tuition and related expenses assuming four years of college, you'll need to save $200 per month from the time your child is born. But if you wait to start saving until your child turns age 13, you'll need to save $1,100 per month to accumulate the same amount.

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This example is for illustrative purposes only and does not represent the performance of any particular investment. This depiction assumes an average annual rate of return of 6% for all investment periods and does not include the assessment of any taxes or fees. If taxes or fees were assessed, the total returns would be lower.

Please note that a 529 plan's disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. State tax benefits are generally only available to residents of that state. Earnings on a distribution not used for qualified expenses may be subject to income taxes and a 10% federal penalty. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors, as applicable.

Learn MoreFor more information on 529 plans, please see "On Course With 529 College Savings Plans."
1 An early start to saving may help you afford future college costs.
2 Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains that the amount you save toward retirement can have a dramatic impact on your retirement.
3 Don Peters, portfolio manager of the
T. Rowe Price Tax-Efficient Equity
Fund, discusses his strategies to minimize capital gains and maximize after-tax returns.
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