Most families want their kids to go to college. However, the cost of college education can be prohibitive. While your kid can apply for a student loan, they will be graduating with a huge debt hanging over their head.
Since college is not cheap and you should not let your child rack up an insurmountable debt, it is best to begin saving for their college education as quickly as possible. Here are some of the best ways to save for your child’s college education.
529 College Plans
This is a savings plan that is specifically created for parents who want to send their kids to college. There many different types of 529 college plans, and each one has its own operating costs and annual fees. Hence, it is best to find a reliable plan with low costs. Today, states also offer these plans and often they are better than private plans. These 529 college plans offer tax benefits. While the money compounds, the earnings are not taxed.
Prepaid College Plan
You also have the option of buying a prepaid plan for a college. Here, you can purchase tuition credits at a college at the existing tuition rate rather than waiting for your kid to reach a college-going age (this is not Doogie Howser, M.D.!) and then paying the prevailing tuition costs. This option can be risky, especially if your child decides at 18 that they don’t like the college you have selected or don’t want to go to college at all. While you can get the money back, it would not have compounded as you anticipated.
UTMA and UGMA Custodial Accounts
UTMA and UGMA custodial accounts allow you to create a trust for a minor. If you have investments such as cash, annuities, bonds, and stocks, you can place them into these custodial accounts for your child. The money from these accounts can be used to pay for your kid’s college education.
However, the college will take the amount in these accounts into consideration when determining the financial aid your child will receive. If the amount is substantial, your child may not receive too much financial aid. On the flip side, you may not need the aid if you have saved up enough.
Save Your Child’s Earnings
When your kid is a teenager, they may be babysitting, working fast food, working retail, or mowing peoples’ lawns. Rather than letting your teen blow this money up on trivial pursuits, teach them to save it for their college education. Let them keep a part of their earnings for their own expenses, but the rest should go to their college education fund. This will also teach your child about budgeting and managing their money prudently, skills that will come handy when they grow up.
If they have to work for their money, they will realize the value of it.
Open a Coverdell Education Savings Account (ESA)
This is a custodial account where the money in the account is solely meant for paying for a college education. The only caveat is that you cannot contribute more than $2,000 annually to the education savings account. This can be a problematic if you are depending just on an ESA to fund your child’s college education. It is best to also have a 529 college plan in conjunction to ensure you save enough to pay the tuition and other associated costs.
In case you are struggling to save for your kid’s higher education, look at scholarships to help you offset some of the costs. Many high schools offer advanced placement courses or have a dual credit system that are counted as part of college credit hours.
This can lower the costs of education. Alternatively, you can choose a community college, which usually has lower costs compared to universities. The positive news is you can always transfer the credits your kid earns in the community college to another university later on and this helps reduce the overall cost of the education.
Saving for college education can be challenging for parents. However, parents have to look at multiple options to save. Usually, 529 college plans are the most popular as they allow some parents to save anywhere from $200,000 to $400,000 (even $50,000 for college is wonderful for your child), but the key is start saving early so that you can achieve your savings goals. If necessary, consult a financial planner to help you choose the best ways to save for your child’s college education.
