Whether you hope to fund part or all of your child’s college education, here’s how to get started.
When families talk about college, the subject of money is never far behind. Seeing so many graduates overloaded with student loan debt, with 19% of borrowers owing more than $50,000 upon graduation, can be pretty scary for parents and students alike.
As parents, you think the best thing you can do for your children is to encourage them to go to college and get a good education — and, hopefully, that will help them land good jobs with higher earning power than if they had high school diplomas alone. But that’s an expensive goal. It’s especially daunting considering that many parents are still paying off their own student loans, while their children born today could end up paying up to four times the current price for tuition if inflation keeps up, according to finaid.org.
But where do you start saving for your child’s education? The option for many is to not start at all. Only 36% of middle-income families and 29% of low-income families are putting money away for their kids’ college fund, according to a study by Sallie Mae. The study also found that the average family is planning to save around $38,953 per child for college, but on average will only save about $19,784. Here are some ways to start saving for your child’s education, and tips to help them fund their education in other ways as well:
College Saving Plans
529 College Plans
More than 30 states offer a 529 college savings plan, also known as Qualified Tuition Programs (QTP). Here’s how they work: You typically invest after-tax money into the plan, and you’re then allowed to withdraw the funds (and any investment gains) tax-free for use toward qualified education expenses, such as college tuition and books. Each state’s plan offers various investment options, annual fees, and operating costs. Contribution limits vary but tend to be quite high compared to Roth IRAs.
If your child doesn’t end up going to college, you may face fees and tax penalties when withdrawing the funds, though you can often transfer the account to another beneficiary. You can usually begin contributing in small increments, but, depending on the specific 529 plan, you may only be able to make a change to your account once a year.
A Roth IRA is a popular type of tax-advantaged retirement savings account, but it can also be used as a college savings vehicle. Like 529 plans, you contribute after-tax money, and any investment gains can be withdrawn later tax-free — most often, after age 59- 1/2, for retirement.
But Roth IRAs also allow you to take out funds tax- and penalty-free to pay for qualifying educational expenses after five years. (You can also tap a Roth IRA without penalty to make a down payment on a house.) That makes it an appealing way to hedge your bets: If your child doesn’t go to college, you can still use the funds for your retirement.
However, there are income and contribution limits.
Single taxpayers earning more than $129,000 per year ($191,000 for married couples) are not eligible, and you can only contribute $5,500 per year ($6,500 if you’re over age 50).
Prepaid College Tuition Plans
These plans are exactly what they sound like: They allow you to pay for portions of your child’s college tuition now, locking in current prices — protecting you from exponential tuition hikes if your child is still years away from attending college. So if tuition at Big State College is currently $10,000 a year, a $5,000 contribution today will buy you 50% of a year’s tuition (or one semester’s worth) — whenever your child is ready to attend school and cash it in. That means that, if tuition at Big State swells to $20,000 a year by the time your kid turns 18, your $5,000 investment will be worth $10,000 in tuition — still 50% of the total bill. More than a dozen states offer prepaid tuition plans, though some are currently closed to new enrollment. Like 529 college plans, gains in these plans are also usually exempt from federal taxes.
Coverdell Education Savings Account
Similar to 529 college plans, a Coverdell ESA is generally tax-advantaged if the money is used to pay for educational expenses. And, like a 529, it’s also considered your asset — not your child’s — so it will have less impact on your child’s chance of getting federal aid. Unlike a 529, Coverdell ESAs can be used to cover any educational expenses, including K-12 costs such as private school tuition.
However, there are some limits: You can only contribute $2,000 per year per child, and eligibility starts to phase out for couples earning more than $190,000 a year ($95,000 for singles). Funds not used by the time your child is 30 may be subject to taxes.
UGMA and UTMA Custodial Accounts
These types of accounts, where financial gifts to a minor are held in a custodial account until the child reaches adulthood, offer another option for saving for your child’s education.
They offer some tax benefits, but fewer than 529 plans. And unlike the other saving options, these types of accounts can also be considered your child’s asset, not yours — which means they can affect the amount of federal aid your child qualifies for when filling out the FAFSA. One more thing to think about: The money belongs to your child, so at age 18 or 21, he or she can use it to pay for college as you imagined… or for something else entirely.
Other Programs to Help Fund Your Child’s Education These programs offer alternative ways to increase your college savings account for your child.
Gift of College
This program allows other family members and friends to give a gift directly to your 529 college savings plan. It’s free for you to register, but there is a 5% processing fee (up to $15 per transaction) when you receive a gift. You create a profile for your child, and your family and friends can give a gift that way. Instead of giving toys or clothes for birthdays, holidays, or other occasions, ask loved ones to make a gift this way, as it can make a more lasting impact on a child’s life. Visit GiftofCollege.com for more information.
Register for a free account on Upromise to earn cashback for college on shopping and dining. You can earn money by registering your credit cards, loyalty cards, and grocery cards, and then receive cashback on eligible purchases.
Anytime you’re shopping online, simply start out on the Upromise website, click through their links, and you’ll be instantly earning cashback on a percentage of your purchase. You can then link your Upromise account to a 529 college savings account or to existing Sallie Mae student loans.
LEAF College Savings
Similar to GiftofCollege.com, Leaf also offers family and friends a way to give a monetary gift toward your child’s education. They pick the amount of the gift card and send it to you via mail, Facebook, or email. Then, you simply redeem the gift by entering the number on the card. That gift can be transferred to any 529 college savings plan.