Most parents dream of paying to send their children to college, but these days, that’s no small feat. The average cost of a public, four-year university is $24,300 a year.
If your child attends a private, four-year university, these costs rise to $50,300 a year. And college costs continue to increase every year, so the odds are it will be even more expensive by the time your children reach college age.
So just like you wouldn’t put off planning for retirement, you shouldn’t put off planning how you’ll pay for college either. Fortunately, with a bit of planning and lots of savings, it’s entirely possible to fund your child’s higher education expenses.
4 Steps to Start Saving for Your Child’s College
If you haven’t yet started saving for college, this process can feel very overwhelming. It’s hard to imagine how you’ll save such a large sum of money in a relatively short period of time.
And if your children are in high school, you’re probably feeling the pinch even more. Here are four easy steps to help you get started.
Step 1: Start as soon as possible
If your children are very young, you may feel like it’s too early to start saving for college. But when it comes to a college savings plan, it’s never too early. The more you save now, the less you’ll have to save later.
So you should start saving for college as soon as your child is born. It is better to start early than to have your children hit high school and realize you never got around to saving for their college education.
Figure out how much money you can reasonably set aside for the college fund every month. Even if it’s only $100, every bit helps.
Step 2: Come up with a plan
Now you need to sit down and take a good, hard look at the numbers. How much will you need to cover the cost of tuition, books, on-campus living, and more?
This number will likely be much higher than you imagined, but don’t let that keep you from taking action. There are ways to make up the difference if you’re short on funds, but you should at least know how much savings you’re aiming for.
Step 3: Pick the right college savings plan
The best way to save for college is by picking the right investment plan. A sound investment strategy allows you to take advantage of compound interest and maximize your returns.
And be sure to take advantage of any tax-deferred options at your disposal. We’ll look at four college investment plans you can consider in a later section.
Step 4: Begin saving consistently
And finally, you need to start saving consistently. Even just investing a small amount of money every month will help you grow your child’s college savings account more quickly. If you take action on these four steps, then you should be able to finance a good chunk of your child’s tuition bill.
The Top 4 College Savings Options
Many parents would like to start saving for college but are unsure of where they should begin. Here are four different college savings options you can consider.
1. Roth IRA
A Roth IRA is a tax-advantaged account designed for retirement savings, but you can also use it to save for college. Your investment will grow tax-free, and if you’re at least 59½, you can withdraw the money tax-free as well.
But if you’re under the age of 59½, you can make a penalty-free withdrawal of up to $10,000, as long as you use the money for qualified higher education expenses. The only disadvantage of choosing a Roth IRA is that your yearly income must be below a certain limit for you to be eligible.
2. Taxable Investment Account
A taxable investment account is a brokerage account funded with after-tax money. Your earnings will be taxed, but you can use the money for any purpose.
Of all the college savings plans on this list, a taxable investment account is going to be your most flexible option. And there are no income limits or caps on how much you can save every year.
3. 529 College Savings Plan
A 529 college savings plan is a tax-advantaged plan offered by the state. Every state offers its own 529 plan, but you can open a 529 plan in whichever state you choose, as most states have no residency requirements.
The benefit of 529 plans is that your college savings will grow tax-free. You can also make nontaxable withdrawals, as long as the money is used for educational purposes. And many states even offer a state income tax deduction for contributions.
4. Coverdell Education Savings Account
Similar to a 529 plan, a Coverdell Education Savings Account is a trust or custodial account that you can set up for someone under the age of 18 to pay for qualified education expenses. You can invest up to $2,000 per year per beneficiary in various stocks, bonds, or other assets. It also grows tax-free.
However, unlike the 529 plan, your contributions are not tax-deductible. In addition, this plan is only available to people who make less than $110,000 for an individual or $220,000 for a married couple that files jointly.
When your child withdraws the money for college expenses, they won’t pay taxes on it. You can also use the money to pay for elementary or secondary education.
5. Prepaid Tuition Plans
A prepaid tuition plan is also similar to a 529 plan, except it allows you to “lock in” tuition amounts at their current rates. Essentially, the state guarantees that the funds will rise at the rate of college tuition inflation. College costs continue to increase every year, so this may be a good option for you.
The only downside is that more restrictions are put on prepaid tuition plans. For example, your child must attend either an in-state public college or choose from a select list of private colleges. And the funds can’t be used to pay for room and board.
How to Save Money on College
If your child plans to attend college in the next year or two, you may feel like you’re running out of time to save for school. If that’s the case, your best plan is to find ways to save money so you can maximize the savings accounts you do have. Here are a few ideas to help you get started:
- Consider community college for two years: Having your child attend community college for two years can cut down on the amount of money you spend on tuition. Just make sure the four-year college they are planning to transfer to will accept all of their credits.
- Apply for scholarships and grants: There is no better way to cut down on the price of college than with grants and scholarships. If your child qualifies for grants and scholarships, that’s free money they won’t have to pay back after graduation. You can check out scholarship boards like Unigo and GoGrad to find possible scholarship opportunities.
- Fill out the FAFSA: Everyone who attends college should fill out the Free Application for Federal Student Aid (FAFSA). When you fill out the FAFSA, your child becomes eligible for financial aid and federal loans. Federal student loans come with lower interest rates and more favorable repayment terms than private loans.
- Graduate in less than four years: If your child is able and motivated to graduate in less than four years, this can save you a lot of money in tuition. Your child can do this by attending summer classes, choosing an accelerated program, and testing out of introductory college classes.
College is expensive, and few parents look forward to paying these hefty tuition bills. But with a little planning, you can make sure your child graduates with little or no student loan debt. And a college degree will set your child up for a lifetime of success, so it is well worth the time and effort spent.