Hello, I’m Chloe. Are you wondering how you can save for college education for your child?
College tuition rates have risen over 25% in the past 10 years and paying for it is no joke!
In 2020, the average cost for one year of college, including tuition, fees, room and board, and other expenses, was $26,820 for public four-year in-state institutions.
This cost increases to $43,280 for public four-year out-of-state institutions and $54,880 for private nonprofit four-year institutions.1
Saving for college is a hefty investment and it’s good to start as soon as you can. It’s so important that it’s one of Dave Ramsey’s steps to financial freedom.
There are a variety of ways you can save for your child’s college education costs. You can start your plan to save for college today with one or more of these six methods.
6 Ways to Save for Your Child’s College Education Costs
1) 529 Plan
529 plans are the most common way to save for your child’s education. These accounts are tax advantaged, which means that you do not pay any taxes on them as long as the funds are used for qualified education expenses.
529 plans come in two forms: prepaid tuition accounts and education savings accounts.
Prepaid Tuition Accounts
Prepaid tuition accounts allow you to pay for today’s tuition rates for credits that will allow you to pay for college in the future. For example, if 100 credits equals one year of tuition, you would pay for 100 credits at today’s rates and those credits would be able to pay for one year when your child goes to college.
Prepaid tuition accounts are currently only offered in nine states.
- Florida – Florida Prepaid College Plan
- Maryland – Maryland529
- Massachusetts – Massachusetts U. Plan
- Michigan – SET with MET
- Mississippi – Mississippi Prepaid Affordable College Tuition Plan
- Nevada – Nevada Prepaid Tuition Program
- Pennsylvania – PA 529 Guaranteed Savings Plan
- Texas – Texas Guaranteed Tuition Plan
- Washington – Washington Guaranteed Education Tuition
Tuition credits from a 529 plan must generally be used before your child turns 30.
College Savings Plans
College savings plans are tax advantaged and allow you to invest in mutual funds or other similar assets. Investments in college savings plans are not guaranteed as they follow the trend of the market. You can use these funds to pay for any qualified undergraduate or graduate institution, in the United States or abroad, and they have no expiration date.
2) Eligible Savings Bonds
Series EE bonds and other bonds are bonds used for education purposes. Savings bonds are backed by the government and have guaranteed interest, which means that they have extremely little to no risk. The downside of investing in eligible savings bonds is that they accrue interest at a slower rate. Bonds are good for people who would like to grow their money at a slow and steady rate without experiencing huge fluctuations from the market.
The education tax exclusion allows people who have qualifying bonds to exclude all or part of the interest from their gross income when used for education if they meet certain criteria. The criteria are as follows:
- The bonds were cashed during the same year as filing for the exclusion.
- You paid qualified education expenses for yourself, your spouse, or your dependents in the same tax year as cashing your bonds.
- Your filing status is not married filing separately.
- You were 24 years or older when the bonds were issued.
- Your modified gross income is less than the cut off set by the IRS, which changes every year. You can see IRS Form 8815 for the current amount.
3) Roth IRA
You might be asking, but isn’t a Roth IRA for retirement? Yes and no. Roth IRAs are typically used for retirement purposes but you can withdraw money for qualified expenses without paying a penalty. One of these qualified expenses is education expenses, which include tuition, fees, books, supplies, and equipment.
If you withdraw your Roth IRA for education expenses, you only pay income taxes on the earnings and avoid an early withdrawal penalty. A Roth IRA has less restrictions than a 529 plan because you can invest in a wider range of options. However, because you pay income taxes on the earnings it might be less favorable than a 529. Roth IRAs however, don’t affect your eligibility for financial aid like a 529 plan does because qualified retirement accounts are not counted when determining your expected family contribution for college tuition.
Make sure you remember that you can always withdraw the principal amount from a Roth IRA without any penalties. If you need a little extra cash to pay for your child’s tuition later on and don’t want to take out a loan, you can use this method.
4) Custodial 529 Account
Opening a custodial 529 account can kickstart your college savings for your child. A custodial account is a savings account that is created under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).
A custodial account is different from a traditional 529 account because the beneficiary gains access to the funds once they reach legal age. The beneficiary can never be changed and the funds cannot be used for anything other than education. This is more restrictive than a traditional 529 account.
Benefits of a Custodial Account
A custodial account will not affect eligibility for financial aid as a traditional 529 account would. This is because if the student has siblings, the siblings will own the custodial account when they reach of age. Now when the student applies for financial aid, the sibling’s custodial 529 plan is now under the sibling’s own name and will not be counted as the student’s parents’ assets.
Another benefit is that the contributor of a custodial 529 account can keep the account a secret from the beneficiary until they would like to reveal it. If the beneficiary does not know of the existence of a custodial 529 plan, they do not have to report it as an asset when applying for financial aid.
5) Individual Investment Accounts
Opening an individual investment account for your child is a great way to grow your money to save for college education costs. It’s also a good way to teach your child about financial responsibility and investing early on.
You can choose to invest in an index fund that tracks an index such as the S&P 500, which has had an average return of around 10% since its inception or you can choose to invest in individual stocks.
Be aware that although the market averages a steady growth rate, there may be years where you lose money on your investments rather than gain money. However, in the long run, you will make a steady return which will help save for college costs for your child.
If you prefer less risk, you can even put your money into dividend stocks. Good dividend stocks are usually stocks investing in steady, well established companies. These companies return a part of their earnings as a dividend to the shareholder every quarter.
This can be a good source of passive income for the shareholder all the while helping save for college.
Did you know that you don’t have to be in high school to start earning scholarships for college? Scholarships recipients can be winners of contests, chosen for merit, or chosen for need. Some scholarships are even specialized for certain audiences such as if you’re tall or want to attend cosmetology school.
Your child can apply for scholarships such as Doodle 4 Google or the Junior Duck Stamp Contest when they’re as young as in kindergarten. The more scholarships your child can win when they’re younger, the more you can save for college education costs so start looking today!
Scholarships are probably the best way to save for college education costs because they are 100% free money. In exchange for the couple hour application process, your child will be given hundreds to thousands of dollars to help their education!
Conclusion on How to Save for College
There are a variety of ways you can save for your child’s college education. Depending on your risk level, you can partake in one or more of the six ways I mentioned here. The earlier you start saving for college, the more you can grow your money. Which methods sound the best for you? Comment below!
About the Author
Chloe is a software engineer working in southern California who has a passion for personal finance. She blogs about credit cards, investing, and side hustles at Off Hour Hustle. When she is not coding or writing, she enjoys climbing, hiking, and skating. You can find her on her website, Twitter, Instagram, Pinterest, and LinkedIn.
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