There is little that matches the excitement of seeing your child graduate from college. However, expenses related to college are no joke. College costs are not only exorbitant but also continue to rise yearly. According to several reports, the cost of getting a college education in the United States of America runs into several thousands of dollars for just one person. This perhaps explains the rise in student loans, as students look for ways to mitigate the cost of college.
However, it is possible to get around the hassles that come with high tuition fees. This is simply through starting on time to save for college. As a parent, you ought to begin preparing for your child’s future before they attain the legal age and become adults. There are several pathways you could explore while saving for college for your kid. Most of them are specialized and allow you some benefits such as saving you from having to pay taxes on the contributions. In addition, some of these accounts make your child eligible for student financial aid, regardless of whether they go to a private college or a public college.
So, what is the best way to save for your kid’s college? This article looks at some of the best practices in terms of saving for your child’s future education.
When to Start Saving or Requesting Financial Aid
Timing is very important when it comes to college savings plans. Different people have differing opinions on when the best time is to start saving for a child’s future college costs. On the one hand. there are those who think a parent ought to start their retirement savings before heading over to education savings. The rationale for this is that it protects the parent against future challenges that could crop up.
On the other hand, some others believe a child’s college education should be the first thing a parent ought to start looking at. Getting a good head start might sure the child will not have to borrow student loans sometime in the future. Also, the younger the child is and the bigger the college contributions, the more likely it is for them to get favorable tax treatment and other tax benefits. Eventually, the financial decisions of when to start saving to pay for college for your child actually depend on you.
How much then should you save? How much money you choose to save depends on how many children you have, what type of school you intend to send them to, and so on. College costs keep rising. Hence, your college savings should reflect that. You should draw your savings from future income, past income, and current income at any stage.
Finally, it might be impossible to avoid student loans altogether. The idea is to make sure that the student’s income is not tied up in loans once they eventually finish college and start making some money.
Ways to Save For Your Kid’s College
Even though saving for college could be dearly tasking, you can do it. A combination of a pragmatic approach (such as settling for a public college) and discipline will provide you with enough funds to pay for your children’s college education even before the time they have to leave. Some certain assets and platforms make it easy for saving for college. We discuss some of them below.
A 529 Plan
A 529 is one of the best ways to pay for college for your children.
Contribution to 529 accounts are made with after-tax dollars just like you have with IRA or Roth (401)(k). The earnings are eligible for tax deferment when you use the funds to pay for qualified higher education expenses. This is also a great option because more than half of the states in the US offer a state income tax deduction or tax credit-based contributions to the state’s 529 plan.
A 529 plan is also eligible for favorable financial aid treatment. For instance, in a 529 plan owned by a dependent student or a dependent student’s parent, the state reports the parent’s assets on the Free Application for Federal Student Aid (FAFSA). The spillover effect of this also is that the parent asset does not have a harsh impact on the student’s eligibility for need-based financial aid, unlike student assets which can heavily impact aid eligibility for the student applying.
This is a particularly favorable way to save for college because almost all states in the United States have a college savings plan. They come in either of two categories: a direct-sold 529 plan and an advisor-sold 529 plan. The latter is available through financial advisors.
However, it is important to look for flexible plans. This allows you to choose the funds you invest in. Fixed or life phase plans are usually no good. Finally, not all 529 plans are considered in the federal financial aid formula. Thus, you have to confirm that your state’s plan is eligible.
You can use two custodial accounts to set aside money for your grandchild or even a random minor. They are the Uniform Gifts to Minors Act (UGMA) account and Uniform Transfer to Minors Act (UTMA) account. The child gets control of the custodial account once they become adults. This means that they can decide not to spend the funds on educational purposes.
Do understand that the funds in the custodial account are counted as part of the student’s assets. This can reduce aid eligibility for the student involved as the Federal Financial Aid Formula stipulates that students have to contribute at least 20% of their savings instead of the 5.6% that parents have to.
Coverdell Education Savings Account
You can set this up with a brokerage firm or a bank to increase your child’s college savings. Just like the 529 plan, there are tax benefits with the Coverdell Education Savings Account. Firstly, the account allows you to pay the qualified education expenses of your child with relative ease. Money in such savings account grows tax-deferred, and you can withdraw money federally tax-free. Some states also provide incentives and allow tax-free withdrawals. Thus, the account is also a tax-advantaged savings account.
Contributions to a Coverdell ESA have to be made before your child reaches college age, i.e., before they turn 18. It is also possible to set up more than one Coverdell account for a singular student. However, there is an income limit of $2000 per annum in such situations.
A Coverdell ESA offers you a great means to start saving for your child’s college tuition on time. The tax breaks, including the state income tax deduction you get with this plan, make it all worth it. In addition, you will be ensuring that your child does not get into a student loan debt in the future.
Savings bonds are available from the United States treasury department and offer a modest investment returns pathway to cover college costs for your child. Generally, they ought to cover qualified college expenses. The interest earned is usually tax-free both on the federal, state, and local levels.
There are several rules that govern the use of savings bonds to save for your child’s college. The first is that the funds can only cover qualified expenses such as tuition fees. Other expenses like room and board are not covered. Furthermore, you will have to withdraw money both from the principal and interest from the bonds. Finally, you should not have financial aid covering the same expenses. Just like a mutual fund, savings bonds are one of the best financial decisions you can make concerning your child’s tuition.
Although a Roth IRA is primarily used for saving for retirement, it can also be used to save for college for your kids. A Roth IRA gives you a tax-free return on investment. This can come in useful when looking to pay off student loan debt or secondary education expenses. Investing in a Roth IRA potentially shields your income forever. This is akin to getting free money from the government; the only difference is that you get to use the funds to pay for college for your children.
Prepaid Tuition Plans
This sort of arrangement allows families to pre-purchase the tuition for their children. When the child then enters college, the program pays the cost of tuition for the child. A caveat is that the child usually has to go to a state-owned institution. If the beneficiary chooses another route, such as going to a private school instead, the owner can reverse the money. Private individuals and the state can all administer prepaid tuition plans.
Best Apps To Help You Save for Your Kid’s College
Before you start saving, using any of the specialized pathways we discussed above, you may want to have your college savings in a money-saving app first. Some of these apps do not just save your money, but also help you with investment advice, showing you where you can invest your funds to make sure your college savings plans for your child see the light of day. Here are some of our top recommendations.
Acorns is primarily an investing app, although you can use it too to save money for your child’s college tuition.
First, you download, sign up and link your account to your savings account. Thereafter, Acorns rounds up all your savings to the nearest dollar. It then invests the difference in an investment portfolio that you choose. This investment portfolio could be mutual funds, a target-date fund, or some other. Management fees are relatively cheap on this platform, with plans going for as low as $1 per month in some cases.Click Here To Get Started
Stash Invest gives you a sure path to beginning your education savings for your child’s higher education expenses. Unlike Acorns, you can virtually start saving money on this platform with a $0 balance. However, if you take it a step further and pay for the $3 per month subscription fee, you get a retirement account where you could be stash your retirement savings as well.
One of the great things about Stash Invest is that it allows fractional shares as one of the investment options for users. Fractional shares allow you to purchase fractions of any given share, instead of paying for the full thing. This is usually the case for the times you do not have enough money to pay for the entire stock at once. It takes a certain level of financial planning to use Stash Invest.Click Here To Get Started
This is also another trusted route when it comes to college savings for your child. M1 Finance has options both for passive and active investors. Additionally, it also offers you the option of purchasing fractional shares, returns which you can invest into paying for your child’s qualified education expenses.
While M1 Finance is a great option for saving for your child’s college and defraying the cost of student loans, if you want to explore mutual funds, then they are not a great option.Click Here To Get Started