5 Strategies for Saving for College

Table of Contents

Introduction – Saving For College

Saving for college can be a daunting task, especially if you’re not sure where to start. The good news is that there are many different strategies and resources available to help you plan and save for your child’s education. In this blog, we’ll cover the basics of saving for college and offer some tips and tricks to help you get started.

Understanding the costs of college

Before you can start saving for college, it’s important to understand the costs associated with higher education. According to the College Board, the average cost of tuition and fees for the 2021-2022 school year was $10,560 for in-state students at public colleges and universities, and $26,820 for out-of-state students. Private colleges and universities tend to be even more expensive, with an average cost of $35,880. These costs can vary significantly depending on the type of institution and the location, so it’s important to do your research and compare costs before making a decision.

Saving for college: Options and strategies

There are several options available for saving for college, each with its own set of advantages and disadvantages. Here are a few of the most popular options:

529 plans: These are tax-advantaged savings plans that are specifically designed for education expenses. There are two types of 529 plans: prepaid tuition plans and college savings plans. Prepaid tuition plans allow you to purchase tuition credits at today’s prices, which can be used at any college or university in the future. College savings plans, on the other hand, work like a traditional investment account, with the money being invested in a variety of securities. Both types of plans offer tax advantages, such as tax-free growth and the ability to claim a tax deduction on contributions.
Coverdell Education Savings Accounts (ESAs): Like a 529 plan, a Coverdell ESA is a tax-advantaged savings account that can be used for education expenses. However, Coverdell ESAs have a lower contribution limit ($2,000 per year) and are only available to individuals with a modified adjusted gross income (MAGI) of less than $110,000 (or $220,000 if married filing jointly). Coverdell ESAs also have more restrictions on how the money can be used, as it can only be used for elementary, secondary, and higher education expenses.
Custodial accounts: These accounts, such as a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, allow you to transfer ownership of assets, such as stocks or bonds, to a minor. The minor becomes the owner of the assets, but a custodian is responsible for managing the assets until the minor reaches the age of majority (usually 18 or 21, depending on the state). Custodial accounts have fewer restrictions than other types of savings accounts, but they do have some drawbacks. For example, any money in the account is considered the minor’s asset, which could affect their financial aid eligibility. Check out our Custodial accounts guide here.

In addition to these savings options, it’s also a good idea to start saving as early as possible. The earlier you start, the more time you have to save and the more opportunity your investments have to grow. For example, if you start saving $100 per month when your child is born and earn an average annual return of 6%, you could potentially have more than $40,000 saved by the time your child is ready to go to college. This is a rough estimate, and actual results will depend on various factors, such as the amount saved, the rate of return, and the length of time the money is invested.

Grants and scholarships

In addition to saving for college, it’s also worth considering grants and scholarships as a way to help pay for higher education. Grants are typically need-based, meaning they are awarded based on financial need, and do not need to be repaid. Scholarships, on the other hand, can be based on a variety of criteria, such as academic achievement, extracurricular activities, or community service. It’s important to start looking for grants and scholarships early, as the competition can be fierce and the application process can be time-consuming.

One way to increase your chances of receiving financial aid is to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is the primary application used by the federal government, states, and colleges to determine financial aid eligibility. It’s important to complete the FAFSA as early as possible, as some aid is awarded on a first-come, first-served basis.

Planning and saving for college

If you’re not sure how much you should be saving for college, there are a few tools and resources available to help. One option is a college savings calculator, which can help you estimate the total cost of college and the amount you need to save each month to reach your goal. Another option is a financial planner, who can help you create a personalized savings plan based on your specific goals and circumstances.

It’s also important to consider the potential impact of inflation on your college savings plan. The cost of college has been increasing at a rate higher than the rate of inflation in recent years, which means that the money you save today may not go as far in the future. To help mitigate the impact of inflation, it’s a good idea to consider investing at least some of your college savings in assets that have the potential to grow over time, such as stocks or mutual funds.

Also read : How to Save Money: A Comprehensive Guide

Conclusion

Saving for college can be a daunting task, but there are many resources and strategies available to help you plan and save for your child’s education. Whether you choose a 529 plan, a Coverdell ESA, a custodial account, or a combination of these options, it’s important to start saving as early as possible and to consider the potential impact of inflation. With careful planning and some effort, you can help ensure that your child has the financial resources they need to pursue their education and achieve their goals.

Frequently Asked Questions (FAQs)

Can I use a 529 plan for a private elementary or high school?

Yes, you can use a 529 plan for private elementary or high school expenses, but the money must be used for qualified education expenses, such as tuition, fees, and certain supplies. It’s important to note that using a 529 plan for elementary or high school expenses may affect your child’s financial aid eligibility for college.

Can I change the beneficiary of my 529 plan?

In most cases, you can change the beneficiary of a 529 plan to another member of the original beneficiary’s family, such as a sibling or cousin. However, some restrictions may apply, and it’s important to consult the plan’s disclosure statement or contact the plan administrator for more information.

Is there a deadline for using the money in a 529 plan?

529 plans do not have a deadline for using the money, but the money must be used for qualified education expenses. If the money is not used for education expenses, you may be subject to taxes and penalties on the earnings portion of the withdrawal.

Can I use a Coverdell ESA for graduate school expenses?

No, Coverdell ESAs can only be used for elementary, secondary, and higher education expenses. If you want to save for graduate school, you may want to consider a different type of savings vehicle, such as a traditional or Roth IRA.

Can I use a custodial account for college expenses?

Yes, you can use a custodial account, such as a UGMA or UTMA, for college expenses. However, it’s important to note that any money in the account is considered the minor’s asset, which could affect their financial aid eligibility. It may be a better option to use a 529 plan or Coverdell ESA specifically designated for education expenses.