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- Open a 529
- Put Money into a Custodial Account
- Open a Coverdell Education Savings Account
- Start a Roth IRA
- Open a Traditional Savings Account
College tuition is frightfully expensive and out of reach for most families in America. What’s worse is that the fees keep increasing every year. Most families take on thousands of dollars in student loans every year to cover the cost of tuition. While this is almost unavoidable, there are ways to save for college can that help you reduce your debt and prepare your child for success.
So, when is the best time to start saving for your child’s college education? The truth is the earlier the better. No need to wait till your child is in high school. Get that savings plan started while your child is still in kindergarten. The earlier you open a savings plan, the more money your child will have available when they need it, and the less they’ll need to borrow.
5 Ways To Save For Your Child’s College Education
Here are some options worth considering when you’re looking for a college savings plan. Some of these offer great tax benefits too.
#1. Open a 529 Plan
A 529 plan is the most popular option amongst parents looking for a college savings plan. 529 plans are very flexible and offer several benefits. These plans encourage you to save towards education costs while taking advantage of tax benefits. It doesn’t take much to get started either. You can open an account with as little as $25 and then increase the amount as your finances improve. The important thing is to keep putting money into your child’s 520 consistently, preferably every month, to get the benefits.
529 plans are usually sponsored by state governments and the specific terms may vary from one state to another. You can put the money into any state’s 529 plan that you think works best for you. Many states let you deduct your contributions from your state income tax. When the money is withdrawn for college, it won’t be taxed either. This can add up to significant tax savings.
There are two types of 529 plans – Educational Savings Plans and Prepaid Tuition Plans. Each has its own terms and pros and cons. Make sure to understand how each one works so you can choose one that works best for you.
#2. Put Money into a Custodial Account
A custodial account is a type of savings account that you open on behalf of a minor. All funds deposited into the account along with the interest that accumulates belong to the minor who receives legal control of all the assets when they reach the age of majority (this may be 18 or 25 depending on the state). On reaching adulthood, the beneficiary can use the funds for anything they want, not just for qualified education expenses.
There are two types of custodial accounts – UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfers to Minors Act). Both are almost the same except for one difference. Both accounts can hold assets in the form of cash, stocks and mutual funds but only an UGMA can hold real estate as one of the assets.
The advantages of custodial accounts are that there’s no limit to the amount of money you are allowed to contribute, and the funds can be used for just about any purpose. The downside is that you don’t get any tax benefits on your contributions. Another downside is that the funds are reported as student assets on the FAFSA. This could adversely impact their eligibility for need-based financial aid.
#3. Open a Coverdell Education Savings Account
A Coverdell Education Savings Account of Coverdell ESA is a type of tax-deferred trust account. It allows you to set up a savings account for a minor beneficiary. The money can be invested in a variety of assets such as stocks and bonds and grows tax-free.
The funds can be used to pay for qualified education expenses. Qualified expenses encompass all elementary, secondary, and higher education expenses from tuition to room and board.
The big advantage of a Coverdell ESA is that the earnings accumulate free of tax. The assets are only free of income taxes if used for educational purposes. Taxes apply if the funds are used for non-educational purposes.
Coverdell ESAs have several limitations. The plan is only available to families who earn less than a specified income. The maximum contribution into each account is $2,000 a year and contributions must stop when the beneficiary turns 18. In addition, the beneficiary must use up all the funds by age 30. Any funds remaining after that age are subject to tax penalties.
#4. Start a Roth IRA
While these are essentially retirement accounts, they can also be used as ways to save for college. Starting a Roth IRA account is a smart way to invest after-tax dollars, while also protecting earnings and assets from taxes. The important thing is to make sure that you set up the account the right way.
As with any other type of college savings plan, there are pros and cons to opening a Roth IRA.
The advantage is that money is locked in with regards to how it can be used. If your child decides not to attend college, you can use those funds you’ve invested towards your retirements.
The downside with a Roth IRA is that other relatives cannot contribute to this savings plan.
#5. Open a Traditional Savings Account
A traditional savings account is a slow but sure way of investing disposable income. You simply open a savings account in a bank in your child’s name and deposit money into it whenever you have spare cash. Any cash gift your child receives can also go into this account. The money in a savings account earns interest and grows slowly and steadily.
The advantages of a savings account are that it is a risk-free investment and the money can be used for just about any purpose. There are no caps on the amount invested, when to withdraw the funds or how to use them. The downside is that the interest rates are the lowest of any other type of investment.
There’s no reason not to start saving for your child’s college education today. College may seem a long way off when you child is a toddler but time flies and before you know it will be time to pay for college. The earlier you open any type of college savings plan the more you’ll save. When it’s time to pay for college, you’ll be glad you got started today.
Need more tips money saving tips? Check out the latest strategies from our CEO, William Staib.
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.34%-15.96%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
4.92% - 15.08% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
4.50% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
 |
5.50% - 14.56% Variable
3.69% - 14.41% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
4.99% - 16.85% Variable
3.47% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
 |
5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
