5 Things To Know When Saving For Your Child’s College Education

college saving

It’s one of the most incredible feelings for any parent. Having your child, the person you raised from birth into adulthood, walk across a stage and take their high school diploma. But all too often mixed in with overwhelming feelings of joy and pride are traces of anxiety and apprehension about what comes next. College. Aside from praying that your kids will befriend quality people, go to bed at a decent time, and make overall good decisions, there is something else to be nervous about and that is how will you afford it?

In 2017 CollegeBoard, one of non-profit governing boards of higher education, published findings that revealed the average cost of Tuition, Fees, and Room and Board. As of 2017-2018, the total cost for a single year of working towards a Bachelor’s degree at a Public Four-Year institution came out to $18,390. For Private Four-Year colleges, the cost was $44,820. And if you think in-state tuition will be your saving grace, you may only be partly right as the average published tuition and fee for full-time students at four-year public institutions was still $9,970, which does not include the cost of room and board. Now these figures are not meant to make you think that paying for your child’s education is impossible, but rather it is to show you just how important it is to save. And whether you have a child just a few years away from school or are stilling putting the finishing touches on your nursery, here are some tips that will help you be ready.

 

Early and Often

As with anything of high importance and high cost, it is critical that you begin putting money away early. Many of us are aware of the fact that the cost of tuition at schools is subject to change and has been on a steady rise for quite some time. This needs to be factored into saving so that instead of preparing to pay current tuition rates, the likely bump in cost is accounted for. The key is getting started and forming the habit of putting a portion of your pay check away towards it. Even taking the time to ask your child what they aspire to can be useul. For example, MCAT test prep can lead to scholarships and cut tuition costs. In addition, be sure to put the money away in an account under your name. Your goal should be to leave the account alone until it is time to pay for school. The beautiful thing about saving is that if you put your money in an account that compounds, your investment will make money for you. With more time to compound, the amount you get back will be even greater than it would be if you got a later start.

 

529 Plan

A 529 is a savings account meant to aid families in putting money aside for the educational costs of their children. The first type is the Pre-Paid plan, which allows you to pay the cost of your child’s tuition with the assumption that they will attend an in-state public school. In the event they do not, you are able to collect the money that you have saved up and redirect it towards the school your child is attending. The only problem with this plan is that many states have stopped offering it.  The alternative plan allows the earnings of the account to grow tax-free. You are also able to withdraw money from the account tax-free as long as the money you take out goes to educational expenses like tuition, room and board, and even computers. Private elementary and secondary school educational costs are now also included as an educational expense as of the January 1st, 2018. The only restrictions on that however are that tax-free withdrawals for k-12 cannot exceed $10,000 per year per beneficiary and the money has to go to tuition. Income tax and other penalties will also be applied to amounts withdrawn if they are for noneducational expenses. Note that you will never receive a tax or penalty on the principle(the initial amount put into the account). You can even automate your account so that money is automatically taken out from your savings account and transferred into the 529 account. There is no limit to the amount you can contribute annually to the account. Just make sure when you set up it up you put it under your name. Universities often demand a greater contribution from the student when determining financial aid so having the 529 as one of your assets will help your student to qualify for more. You can compare 529 plans at Savingforcollege.com.

 

Coverdell Education Savings Account
 

Coverdell ESAs are very similar to 529 plans. Just like a 529, they grow tax-free and also allow for tax-free withdrawal when money is spent on educational expenses. One instance where Coverdell ESAs do vary relates to k-12 educational expenses. While a 529 can only be used for tuition expenses for k-12 up to $10,000, in Coverdell ESAs money can be used for books, equipment, tutoring, and even special need services. This account allows for a maximum contribution of $2,000 per year per beneficiary. Even in the event that multiple people were to contribute, the total amount allowed would remain fixed. After the beneficiary has turned eighteen, no new contributions can be made to the account and the money must be taken out before the beneficiary is thirty years old to avoid taxation. Once again, be sure to put this account under your name instead of your child’s.

 

UTMA and UGMA Custodial Account

UTMA and UGMA accounts are custodial accounts that are only accessible to your child once they become an adult. Unlike the 529 and Coverdell ESA plans, their use is not confined to educational expenses. Because custodial accounts are under the name of the beneficiary(your child), they will be able to use the money however they like. The account is considered to be an asset in the name of the child and will thus have a portion of the investment income taxed according to the child’s tax rate. Eventually excess income will be taxed at the parents’ marginal tax bracket, which highlights a disadvantage to the plan. The parent can withdrawal amounts from the account for expenses that arise for the child and once again, these do not need to be educational costs. Just like the 529, there are no contribution limits to these accounts.

 

Other Useful Tips

First and foremost, be frugal where you can and make sure to keep your eye on the ball. In the event you find you have a little extra money, whether from a pay raise or a bonus, remember the important things.  Those tickets to the game or a few new accessories may be nice, but where do they really stand on your priorities list? That does not mean you can never treat yourself, but putting away today will help you down the road and you’ll thank yourself later.  

Looking past taking from your pay check, there are a number of other strategies that you can begin implementing in order help increase your savings. You can cut back on the number of exotic vacations you take and instead focus on domestic fun. Instead of buying that nice new BMW SUV go for the more affordable Ford model. Even consider minor alterations to your home to reduce your spending on energy costs. And always, always, ALWAYS prioritize saving for retirement over saving for your child’s education. As cruel as it may sound, your children will always be able to take out loans, get scholarships, or find another means of financing their education while there are no such options for your retirement.

 

Looking Ahead

College will be here before you know it so it is important you begin saving up now. There are more options for saving out there, but the ones listed should help you on your way, especially if you have no idea where to begin. Just make sure you stay smart, calm, and patient. College is such an important time in anyone’s life so doing all you can to give your child as many options as possible doesn’t just have monetary implications. If you do this just right, the bright future before your child will shine even brighter.

 

About the Author

Douglas Keller has been a financial expert for 20 years, helping people reach financial stability. He now provides personal finance tips on his blog Peak Personal Finance, where he helps people save money on their bills every month.