The cost of a college education continues to increase, even outpacing the rate of inflation. As such, it’s recommended that parents start saving for their child’s education early. While this can feel like an overwhelming task, start with a plan involving the following factors.
Start Saving Early
Today, annual tuition for a state university hovers around $11,000 and more than triple that for private colleges. If your child attends college out of state, you also need to account for room and board expenses. Yet with a savings account, every deposit adds up:
- Consider automatic monthly transfers from your checking to savings account or participate in a cash-back program to set aside a portion of your income.
- Anticipate new expenses and evolving income. As your child grows, you will likely need to spend less on care and have more funds to put toward college savings.
- When setting a financial goal, it’s recommended to multiply $2,000 by your child’s age to determine how much you should have in a college savings account.
- Avoid dipping into your retirement account to reach these goals. Long term, you may find you’re short on retirement as your child pays off their student loan balance.
Investment Plans and Education Savings Accounts
Options to grow and build interest over time to meet higher education costs include:
- 529 Plan: Sponsored by state agencies and higher education institutions but not taxed by the federal government, your investment to grow tax free. These plans are intended for college tuition and related expenses, so withdrawing funds for another purpose will result in a penalty. If one of your children decides not to go to college, you can update the beneficiary to another family member.
- Savings Bonds: Consider purchasing U.S. savings bonds from the Treasury, which can be redeemed later to pay for higher education expenses outside of room and board. Guaranteed by the federal government, these low-risk debt securities appreciate at a slower pace. Parents have the option to exclude these funds from their annual gross income, as state and federal governments do not tax their value.
- Roth IRA: Considered both a retirement plan and an alternative to saving for a college education, Roth IRAa are an after-tax investment. You have the option to withdraw funds at any time – although you may face a penalty if you haven’t turned 59 ½ yet – including for qualified education expenses if the account has been open
for at least five years. If your child chooses not to attend college, you can put the funds toward their retirement.
- Mutual Funds: While contributions are taxed, mutual funds allow for unlimited investing and create a more diversified portfolio, including stocks and bonds. Gains are taxed only when the shares are sold. However, mutual funds count as an asset and may impact your financial aid package.
- Coverdell Education Savings Account: This tax-deferred option helps you build funds for paying higher education-related expenses, including room and board. Yet these accounts are geared toward individuals with a gross income of no more than $95,000 or a family with $190,000 and the funds must be used before age 30. You can’t deposit more than $2,000 per year and contributions can only be made before the beneficiary turns 18.
- Custodial Account: This type of savings account is also made up of diversified assets – stocks, mutual funds, cash and real estate – and has no deposit limit. No matter the format you select, your child can do what they wish with all funds once they turn 18.
Other Saving Strategies
Combine your savings and investment efforts with the following:
- A permanent life insurance policy, which lets you access funds at any time, for any reason, and provides death and living benefits. Funds may be used for education costs without penalty and your policy won’t be counted as an asset for financial aid.
- A home equity loan can be ideal if you have paid down your mortgage. While not a primary strategy, it can assist with education expenses if you haven’t saved enough.
- Get your child involved. Your child can take Advanced Placement, International Baccalaureate or dual-enrollment classes which, based on test scores or grades, can be transferred toward a bachelor’s degree to fulfill general education requirements. They can also contribute to their accounts through a summer or after-school job.
- Financial aid, including grants, institutional and outside scholarships awarding your child’s achievements, talents or leadership ability.
- Consider alternative paths, including your child starting at community college and transferring an associate degree or other earned credits toward a bachelor’s degree.
Planning for your child’s future? Work with Ion Bank to develop a multi-faceted financial strategy. Explore savings accounts, investments and personal loans to reach your goals.