College Saving Strategies for Your Child’s Education.
One thought that arises when you become a parent is how you will pay for their college education and the amount that you’ll need to save. Even though eighteen years from the time of birth may seem a long way off, it is essential that you start saving early enough towards your child’s college expenses. Saving as early as you can is the best strategy you can use to prepare for the high cost of college education.
The great thing is that there are different ways that you can use to save specifically for your child’s education in order to save you and your child from student loan debts.
These options include the following:
College savings investments have options that are education-oriented plans and those that are more general plans.
College savings specific investments include:
- 529 plans
- (Coverdell) Education Savings Accounts (ESAs)
While other general options include:
- Target-date funds
- Certificates of Deposit (CDs) and savings bonds
- Savings accounts
- Roth IRAs.
Whichever plan you choose to go with, it is important that you start early, contribute consistently, and keep it low-risk and liquid.
How much do you need to save?
Even though building a college fund could be a challenge, one good thing about these college saving strategies is that you can start saving as soon as your child is born, so this gives you about eighteen years to save a good amount. The average annual cost of college tuition and fees could be as low as $9,000 annually for in-state residents at public universities and as high as $31,000 per year (or more) at private colleges. Depending on the number of years the degree that will be undertaken requires, a student would typically spend four to six years in the University for a bachelor’s degree. Note that the above mentioned costs do not even include food, housing and transportation.
When you multiply the annual cost by the number of years, the amount will jump up to hundreds of thousands of dollars and that is no small amount. With an idea of what the total costs will be, you can break that amount down into monthly saving goals, providing you with a solid strategy.
Let’s say you estimate about $50,000 in annual college costs for four years when your child turns 18. If you save about $500 per month now and earn 5% along the way, you should have enough to cover all expenses when your kid is ready for college.
If you commit to making small contributions to your kids college fund over a long time period, you would be ensuring smooth sailing later on. To do this, you can make use of the following available college saving strategies to help you meet your goal.
1. 529 college savings and prepaid plans
A 529 plan is one of the best college savings plans you could use because the money contributed here can grow and be used tax-free when your children go to college as long as the money is expended on qualifying education costs. It is one of the most popular college saving strategies as it is an education –specific savings plan. The beneficiary can be changed in cases where a child chooses not to go to college or gets a scholarship and the plan allows high contribution rates with no age restriction or household income limit.
The best 529 college savings plans come in two types: as a prepaid tuition plan or as an investment savings account.
529 savings plans
A 529 investment savings account allows you to invest in mutual funds or exchange-traded funds that carry the same risk/return profiles of other stock-and-bond-based investment accounts. You are allowed to set aside post-tax contributions that grow tax free, with much higher contribution limits than a Roth IRA. The amount saved here can be used to cover qualified educational expenses like room and board, books, and tuition. Cars and general living expenses are not included. It can be used at any college and not only those in the resident’s home state.
529 prepaid tuition plans
529 prepaid tuition plans allow you to “lock in” the cost of tuition in a way that avoids the impact of ever-increasing fees that rise an average of 5% annually. This plan allows you to pay in advance part or all of the costs of attending a certain university or a group of them that make use of a particular plan and thereby avoid future tuition hikes. However, some educational systems have terminated their prepaid plans while some plans still operate but are closed to new students.
2. Education Savings Accounts
These are similar to 529 plans. Withdrawals on qualifying education costs are tax free and you can buy a variety of investments, however, there are income limitations, your contributions are limited to $2,000 per year, and can be made only before the beneficiary turns 18. Another disadvantage is that all assets must be disbursed to the beneficiary by age 30. Coverdell accounts allow qualified educational expenses throughout the life of the beneficiary (up to grad school).
3. Roth IRAs
Roth IRAs provide flexibility and you can use it as a retirement account and educational savings account. Withdrawals are penalty free (for qualified education expenses) and with it, you gain maximum growth potential since after-tax contributions grow tax free. You can also decide to invest in an array of mutual funds, stocks and bonds.
Trusts are assets which are transferred to a child’s account and invested on his behalf until he reaches the age of trust termination (typically between 18 and 21). Beneficiaries are allowed to use the funds for whatever they like once they come of age. Hopefully, your kid uses it wisely.
5. Savings accounts
A lot of people use savings accounts to put money aside for their children’s education. It doesn’t afford much interest but it does come with a lot of flexibility seeing that you can withdraw it when you like for whatever you want. This could however lead to a depleted college fund if you are unable to replenish it.
Use of multiple strategies
To save efficiently for your kids’ college education, an effective college saving strategy could be to combine different plans. You could opt for a Roth IRA and a 529 plan if it suits your long-term goals and the number of possible beneficiaries.
Starting early and staying consistent is much more advantageous than starting late and making irregular contributions.
At Arrowroot Family Office, we will provide you with the best college savings strategies in line with your long-term goals to secure the future of your children. Contact us today to start working on the best college savings plan for you.