According to a 2018 Sallie Mae study, saving for your child’s college education ranks among the top goals of parents of children under the age of 18. With any luck, those parents started early — it’s estimated that the average college graduate’s student loan debt rests at over $37K.
Don’t panic quite yet. We’ve curated a list of the top tips and tricks to save money for your child’s college education. While tuition won’t be free, we can help prevent your great-grandchildren from inheriting post-secondary debt.
Saving for Your Child’s Education: When Should You Start?
The short answer? As early as possible. It’s never too soon to saving for your child’s education. Yet, according to Sallie Mae, a mere 56% of parents are actively saving for their children’s education.
It’s possible you won’t have to save the full amount. Mark Kantrowitz, SVP of the Edvisors Network, suggested in a Bankrate article to save only one-third of the expected cost of post-secondary education. The balance can be paid over a longer period of time through loans, grants and scholarships.
Kantrowitz recommends looking at the projected costs of your child’s desired school, then dividing the number of months remaining until he or she goes to college; that figure would be your required monthly savings. For example, if your child was born this year, you’d have to come up with approximately $150 per month for a public college.
Pay Yourself First
The longer answer is a bit more nuanced. “It’s important not to ignore your own financial goals,” Miata Edoga, President and Founder of the financial education company Abundance Bound, tells Parentology. “Saving for your kids’ education is fine, but not if it means that your bills go unpaid or your retirement savings plan falls by the wayside.”
Edoga recommends putting a portion of your income towards a 401K or a Roth IRA, then paying off any outstanding loans or debts before committing to a savings plan for your children. “You’ll be less likely to dip into those funds — which can be costly — in the event of a family emergency.”
Behavioral economists also suggest setting up an automatic deposit system from your paycheck. According to their research, we are more likely to be successful when we don’t “see” the money coming out of our account.
What Savings Plans Are Available?
Education Savings Account (ESA)
With an ESA, you can save up to $2,000 (after taxes) per year, per child. You’re not taxed on the growth of the account, and the rate of return is much higher for an ESA than with a regular savings account. Plus, you won’t have to pay taxes when you withdraw it for your child’s education.
One key difference between an ESA and other savings accounts is that there’s more flexibility regarding what is considered to be “qualified” education expenses without receiving a penalty.
The downsides of an ESA are the $2,000 contribution limit, and most won’t accept contributions for children over the age of 18. The rate of growth will vary depending on the assets you’ve accumulated, and there’s an income limit to qualify, so be sure to check with your banking institution to determine your options.
If you want to invest more than the $2,000 limit of an ESA, or don’t qualify for an ESA at all, a 529 Plan is another savings option. A 529 allows parents to invest in diversified, low-cost stocks and bonds, and then withdraw the money tax-free for their child’s education.
It’s important to note there are qualifications for assets saved in a 529 plan. Funds can be allotted towards undergraduate or graduate studies at an accredited 2 or 4-year campus in the United States. Because you (the parent) are the account holder, the savings in a 529 technically belong to you.
“Make sure you can choose the funds you invest,” Edoga advises. “You should also be able to change the beneficiary if the child you’re saving for decides not to go to college. You want options for the money you’ve set aside.”
Unlike a traditional IRA or 401K, a Roth IRA has an air of delayed gratification. In this instance, you pay taxes on your contributions each year. Contributions are then invested in stocks, bonds, mutual funds or other portfolio investments.
Unlike other IRA plans, you pay no taxes on distributions. You can withdraw funds at any time without penalty, which makes them ideal for college tuition, buying a first home, or a family emergency. There may also be restrictions based on income, so it’s best to check with a financial advisor to see if a Roth IRA would be a good fit.
Uniform Transfer / Gift to Minors Act (UTMA / UGMA)
A UTMA/UGMA isn’t just for college savings. While the account is established in the child’s name, it’s actually controlled by you, the parent (or another specified custodian such as a grandparent).
The custodian manages the account until the child reaches the age of 21 for a UTMA and 18 for the UGMA. These accounts can help your child through his junior and senior year expenses. “The lead up to college can be quite expensive,” says Edoga. “There are club fees, application fees, travel expenses, etc. These are all up-front costs associated with education, yet there’s no financial aid available for them.”
At the designated age, control of the account transfers to the child, who can then use it however he chooses. Be aware, however, that once the beneficiary has been chosen, he or she can’t be changed. “I would also advise that your child spends the money on school expenses before he actually attends,” Edoga says. “Otherwise, it could affect what kind of financial aid he qualifies for.”
This isn’t exactly saving for your child’s education, but it certainly helps. Encourage your child to apply for as many scholarships as they qualify for. We’ve written a great piece about 10 great ways to win a college scholarship here.
Advanced Placement (AP) Classes
While they’re still in high school, students can take AP classes to earn college credits early, which means one less college course to pay for. Advise your child to meet with his or her guidance counselor for more information.
Either working full-time during the summer months or part-time during the school year, having employment will give your child not only supplementary income but valuable job experience as well.
“We’ve bought into the notion that’s it’s exclusively our responsibility as parents to fund our kids’ education,” Edoga says. “But it’s very important to have conversations as early as possible about the choices they’re making regarding school, and the financial discipline it takes to make those choices a reality.”
You can arrange with your bank to have a fixed amount come off of each paycheck into a dedicated savings account. Conversely, most banks have savings accounts that cater specifically to students (for example, no monthly fees). Check with your branch for the best options available to your family.
Prepaid Tuition Plan
If you’re looking for a “buy now, save later” system and think your children will attend in-state colleges, a prepaid tuition plan allows you to pre-purchase tuition at a current fixed rate, so the price won’t go up once they’re ready to attend school.
With a prepaid plan, you’ll have to consider age and timing. “Some plans want you to lock in for at least 3 years before you can use the money,” Edoga says. “In other cases, the beneficiary has to be at least 15 years old or younger when you start the plan. It all depends on the institution’s criteria.”
An Educational Trust
A trust can be used when someone holds funds on behalf of another person, with the intention of eventually handing the money over.
With an educational trust, there would be a stipulation that assets must be put towards the recipient’s education. Just ensure that the beneficiary is aware that they could be taxed on trust fund earnings.
Even if you haven’t had the chance to start saving for your child’s college education, it’s never too late to start. With dedication, strategy and hard work, anything you can accrue between now and his first day of school will likely be tax-free (depending on the savings plan you’ve selected) and can be used towards other expenses.