College education has become enormously expensive over the decades (but it’s worth it if you choose the right major which is not philosophy or humanities!). Many kids today think of choosing a community college rather than private institutions or skip college altogether to avoid debt. Saving for college is an important part to have the funds ready to pay for their education when needed.
Though someone can obtain over $35,000 for college if they just do four years in the US Navy for instance! Choose a rate!
It can be scary to imagine that your child might end up being part of the current statistics of 19% graduates burdened with an average student debt of more than $50,000. However, there are ways you can help make it easy for your child to finance their college education.
These 10 tips will help you start systematically saving for your kid’s college education.
1. Plan ahead when planning to save for college
It is never too late to start saving for a child’s education. You may try to start saving even before your child is born or has just stepped into kindergarten. This will make it much easier to save a substantial amount by the time your child is ready to enter college.
Your money has more time to grow when you start saving early. If you haven’t already started saving for your child’s college education yet, then make sure you choose the most appropriate investment options that are tax free to maximize your benefit.
2. Have clear savings goals in mind
It is important that you set clear financial goals about the amount you want to save after factoring in tuition, books, and living expenses. Create a game plan regardless of where you are with the savings and how long you have to come up with the amount.
Every investment benefits from discipline. By listing out your financial goals and creating a game plan, you will know the exact amount that needs to be set aside each month.
While you are at it make sure you do not end up using the savings for something else like gifting your child a laptop on his 16th birthday.
3. Open some investment accounts to store funds in
Open an investment account under your name to maximize control over the savings. Mutual funds are a good investment option.
However, these come with market risks and are not tax free. On the plus side, there are no contribution limits or income limits, and you get complete control over the withdrawals.
Many parents also prefer opening a savings account or a CD. However, you need to be careful with these are your child might not be able to apply for financial aid. Students who have a sizeable savings under their names usually end up with less generous financial aid packages.
4. Consider a Roth IRA
Roth IRA is a popular financial savings plan for retirement that has a tax advantage. However, it is gaining momentum as a college savings vehicle as well. You can deposit monthly contributions to a Roth IRA and withdraw the investments later which are usually tax and penalty free.
Roth IRA is one of the best ways to hedge against risks. It allows you to use the amount saved tax free and penalty free towards making a down payment on a house. Hence, you do not lose out on any money as with 529 college savings plan if your child decides not to go to college later.
5.UGMA/UTMA Custodial Accounts
UGMA stands for Uniform Gifts to Minors Act and UTMA stands for Uniform Transfers to Minors Act. In these, financial gifts to a minor child can be held in a custodial account until he reaches maturity age. These are less risky than 529 College Savings Plan if your child decides not to go to a college.
These accounts are considered as your child’s assets and can affect the federal aid amount while filling out the FAFSA. They come with a few tax benefits as well.
6: 529 College Savings Plan
529 plans, also known as college savings plans, are offered in more than 30 states. These plans are a good way to use investments tax free towards educational purposes. You can invest after-tax money and use it to pay for college tuition and books.
Plans in terms of operating costs, annual fee and investment options vary as per the state. Contribution limits in 529 savings plan tends to be higher than Roth IRA. Also, you may face tax and penalties if your child doesn’t end up going to college. These plans have an option of transferring the savings to another beneficiary.
7. Coverdell Education Savings Account
Coverdell ESA is tax advantaged in the same way as 529 College Savings Plan. However, the money should only be used towards educational purposes. It will also have less impact on FAFSA as this is considered as your asset and not your child’s.
These are more flexible in terms of coverage and can be used to pay for K-12 costs such as private tuitions. However, these accounts come with contribution limits of $2,000 annually. These are also subject to tax if your child does not use the funds before 30 years of age.
8. Get Your Kid to Pitch In
It is never a bad idea to instill the habit of saving in your children. You can kick-start the habit by getting your child to pitch in for his or her college education. This might not be helpful if you have a toddler. However, a babysitting teenager or a burger flipping high school graduate might be able to save more than you can imagine.
9. Automate Savings
The first rule of saving for college is to make it easier on yourself. You should try to automate savings wherever possible. Set up automatic instructions so that every month a portion of your paycheck is deposited to your investment accounts such as 529 college account or any other savings account.
You can utilize technology in other ways to maximize your savings. For instance, you can enroll in ‘keep the change’ program of Bank of America where every purchase is rounded up and added to your savings account. You can also register for a free account of Upromise where you can earn cash back on dining and shopping for college.
10. Prioritize Finances when saving for college
This is probably the most important guideline. Regardless of where you stand in your goals to save for your child’s further education, it is important that you prioritize your finances.
Do not let your own debts (such as credit card bills or mortgage payments) suffer. You need to save for retirement and establish an emergency fund as well. You can support your child’s college education only when your own finances are in order first.