What is saving for college?
Saving for college is a great way to set aside funds for future education expenses.
According to College Board, the average tuition and fees and room and board for private nonprofit colleges for one year are $42,419 and $18,943 for public in-state colleges. Without prior saving, you might be forced to take out student loans and end up stuck with debt. So how do you start saving?
Start early! The earlier you start, the longer your savings will have to increase through compound interest.
Even small amounts make a difference.
Let’s say you save $100 a month at an interest rate of 5%. In 18 years, you’ll have more than $35,000.
You can also choose from various accounts
- 529 Plans – A 529 Plan is a plan to help families set aside funds for future college costs and is usually operated by a state or educational institution. These plans can differ from state to state.
- Prepaid Plans – A Prepaid Plan is a type of 529 account that allows families to purchase tuition at today’s prices and redeem it in the future. Since the state absorbs any tuition increases in the years between, this safeguards against inflation.
- Coverdell Education Savings Account (ESA) – A Coverdell allows families to make an annual non-deductible contribution to a designated investment trust account. You will need to meet certain requirements to make contributions and withdrawals.
- Custodial Account – This account is established under the UGMA (Uniform Gifts to Minors Act) or the UTMA (Uniform Transfers to Minors Act). Custodial accounts are set up by an adult for the benefit of a minor. The custodian manages the assets for the minor until the minor turns 18 or 21 (different for each state).
- Roth IRA’s – In a Roth IRA, you pay taxes on money going into your account, but all future withdrawals are tax-free. It allows you to save money for college but also gives you the flexibility to shift your funds to retirement savings.
Calculator: How fast can your money grow?
Comparison of Plans
|529 Plan||Tax breaks; Account earns interest; Unlimited contributions per year; Minimal impact on financial aid||If your investments decline in value, you could lose money; Must use money for college or will pay penalty.|
|Prepaid Plans||Allows parents to lock in tuition rates; Tax incentives||Not offered by all states; Limited contributions per year; Only covers tuition, not room and board|
|Coverdell Education Savings||Can use to fund elementary and high-school expenses as well as college; More investment options than a 529 plan; Can transfer from one child to another; Minimal impact on financial aid||Must meet income restrictions; Can only contribute a maximum of $2,000/yr/child; Age restrictions; Penalty for withdrawing funds for non-qualified expenses|
|Custodial (UGMA’s/UTMA’s)||Easy to set up; All income levels eligible; Few restrictions; Wide variety of investment choices||Heavily taxed; Earnings taxed to the child beneficiary; Can’t switch beneficiaries; Will impact financial aid eligibility|
|Roth IRA’s||Invested funds can be shifted towards retirement; Principal can be withdrawn tax-free and penalty-free||Not tax deductible; Has maximum contribution limits; Can impact financial aid eligibility|