Mad Money

Cramer: How to increase child’s long-term net worth

Cramer's Playbook: Protect your kids from student loan debt

(Click for video linked to a searchable transcript of this Mad Money segment)

If you're a parent, Jim Cramer says there's something you can do to help drive your child's long-term net worth: Offset your son's or daughter's college tuition as much as possible.

"Study after study shows that students who graduate with no debt end up being worth a lot more money than their classmates who have outstanding student loans," Cramer said.

And the "Mad Money" host believes one of the best ways parents can make the gift of a college education is by opening a 529 College Savings Plan.

"The rules differ from state to state, but generally speaking, in a 529 you pick between a mix of different mutual funds, just like with many 401(k) plans," Cramer said.

He suggests choosing a low-cost fund that mirrors the market.

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"Although the contributions are not tax deductible, once your money is in the 529 plan, you don't pay any taxes on your gains, so they can compound, tax-free, year after year," Cramer said.

The principal can grow significantly.

Because of federal gift tax laws, you can only contribute $14,000 a year if you're single, or $28,000 if you're married and you file your taxes jointly.

However, in a 529 College Savings Plan you can front load up to five years' worth of contributions without incurring that tax (as long as you don't write any checks to the beneficiary as gifts.)

Therefore, "you could potentially invest $70,000 into a 529 right from the start, or if you're married and filing jointly, you could contribute $140,000," Cramer said.

If you can swing it, the compound interest generated by a flat $70,000 over 18 years may be all you need.

"Contribute $70,000 right off the bat, and put that money in a low-cost index fund that mirrors the market, and the rule of thumb is that over time, you'll make an average of roughly 8 percent per year," Cramer said. "So if you make that contribution right when a child is born by the time he or she is ready for college, the value of your 529 plan will have doubled and doubled again. If you started with $70,000, then after 18 years, barring some kind of market catastrophe, you could have as much as $280,000."

They key to the 529 is to front load as much as possible, so the money can grow as much as possible for as long as possible.

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Of course, Cramer realizes that most people can't drop $70,000 into a 529 Savings Plan the day their child is born. But he says doing what you can, as early as you can, will make a big difference in the long run.

The 529 Savings Plan is a powerful tool that can offset the costs of college. And as noted above, "students who graduate with no debt end up being worth a lot more money than their classmates who have outstanding student loans."

Call Cramer: 1-800-743-CNBC

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