Got College-Bound Kids? Try These Proven Ways to Start Saving For College
College is expensive. According to the College Board, students at public four-year colleges can expect to cough up over $30,430 in both tuition and board throughout their studies.
Further compounding the problem is the staggering levels of student debt loans. Recent statistics from the Federal Reserve Bank of New York puts the figures at $1.3 trillion. The average for every college graduate is a whopping $37,172.
As such, both parents and students should take proactive measures to start saving early for college.
When to Start Saving for College
The sooner you start saving for college, the better. Like with most financial goals, an early start gives you a boost from compounding.
Starting a College Fund
First, determine how much you need to save for your college of choice. Rather than setting up a traditional bank savings account for your child’s college funds, consider a tax-favored plan described in the sections below and offered by financial institutions such as College Savings Bank, acquired by NexBank.
Some of the tax-sheltered college savings plans include:
529 Plan
A 529 plan is a tax-advantaged method to save for college. It’s especially ideal for individuals who don’t meet the income requirements for an ESA.
Unlike other college savings strategies, a 529 Plan allows higher contribution rates. You can contribute up to $300,000. Also, the right plan will give you the option to change beneficiaries from one family member to the next.
Pros
- No income limits or age restrictions
- Tax-free growth
- Higher contribution rates (up to $300,000)
Cons
- Restrictions may apply when you transfer a 529 Plan to another child
Education Savings Account (ESA)
An ESA is one of the best college savings plans. It allows you to save $2,000(after tax) for each child per year. Savings in this plan grow tax-free.
If you start saving as soon as the child is born, for example, you’d only invest $36,000. The money will compound each year and grow at a higher rate compared to a regular savings account. Better yet, you won’t pay a dime in taxes.
Pros
- Grows tax-free
- Diverse investment options
Cons
- Contributions limited to $2,000 per year per child
- The beneficiary must use savings by age 30
- Income limits apply
UTMA/UGMA (Uniform Transfer/Gift to Minors Act)
Unlike ESA and 529 Plans, a UTMA/UGMA savings plan isn’t restricted to just education savings. While the account is registered in a child’s name, a guardian or custodian has full control. The trustee manages the account until the child reaches the age of 21 (age 18 for the UGMA). After that, they transfer the account to the beneficiary child, and they can use it anyway they choose.
Pros
- Tax advantages for contributor
- Funds can be used for more than just college
Cons
- The beneficiary can choose how to spend the funds one they reach legal age (not necessarily college)
- Beneficiary can’t be changed once selected
Final Thoughts
It’s never too early to start saving for college — even if your child is just beginning to walk. In fact, that’s a great time to start contributing to a college fund.
Luckily, you have a variety of options to choose from as you embark on your journey.