What is the Best Way to Save for College

What is the Best Way to Save for College

Do you already have the money to support your child’s education or are you worried about the education loan your child may have to take?

Let’s agree that as parents we always try doing our best for our children especially when it comes to providing quality education. When your child is ready to take the step towards college life, we tend to look for the best college courses and the most elite school thinking it maybe the gateway to a successful career and higher paychecks. However, providing that best quality education and fulfilling that dream can be an expensive affair.

5 Best Investment Plan to Save For Your Child’s Education

  1. State College Savings Plan / 529 Plan
  2. Roth IRA
  3. Prepaid College Tuition Plan
  4. Coverdell Education Savings Accounts (ESAs)
  5. Custodial Accounts

Today, securing admission into a reputable college is highly competitive, and at the same time, it is becoming an everlasting status symbol in the society. The increasing cost of college education is pretty scary putting most parents under tremendous financial pressure. That said, the only possible option parents have is to turn to student loan debt for their child’s education. Funding a child’s college education is most often the second-largest expense that an individual is faced with in their lifetime, other than purchasing a home.

According to a report by the College Board, the average fee price for full-time in-state students at public four-year colleges and universities is growing at a rate of 2.5%. (Tuition and fees for 2017-18 was $9,980 as compared to 2018-19 which is $10,230) https://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2018-19

So, what’s the best way to save for your child’s college education?

Outlined below are some of the financial investment tools that can help you save money for your child’s education in the best possible way.

  1. State College Savings Plan / 529 Plan: The State College Savings Plan also known as 529 college plan or a qualified Tuition Programs (QTP) is an excellent option for saving for your child’s college education. More than 30 states offer this plan in the US. The money invested in the 529 college plan gives you an opportunity to earn stock-market returns which means that your money grows without you paying any further taxes on that growth. And, the best advantage of this plan is that earnings from these investments are taxed at student’s tax rate which is usually lower than their parent’s.

    The 529 plan is easy to access, and most states do not impose any limit on the annual contributions; however, they do have a lifetime contribution limit, which varies state-wise. This investment plan has been designed to help parents save substantial money for their children’s higher education so that the funds can be used for paying the college expenses like college tuition fee and books etc. However, if the money is not used towards the qualified education expenses, then you may attract a penalty of 10% to 15% on your accumulated earnings or 1% of the account balance. Hence, you must be very careful before investing and ensure that you do not over-save in 529 plan.

  2. Roth IRA: A Roth IRA is a popular instrument that can help you save money for your retirement, but it is also a terrific and flexible alternative that can be used for saving money for your child’s higher education. Unlike 529 plans, that only covers the college expenses, Roth IRA can be a great tool to cover both college expenses and retirement income. Any earnings or investment gains from Roth IRA account can be withdrawn tax-free however you can exempt withdrawn penalties if you use these funds towards paying college expenses including tuition, books, fees, room, and board. (The contribution portions of your Roth IRA balances can be withdrawn tax-free.)

    A Roth IRA account allows you to withdraw money for college expenses and at the same time covert your leftover dollars to retirement income without any tax implications or penalties. Just like everything else, a Roth IRA plan does have some drawbacks such as it has some strict contribution limits and also people with higher incomes are prohibited from investing in this plan.

  3. Prepaid College Tuition Plan: Similar to the 529 plan, the Prepaid College Tuition Plan is a specific tax-advantaged investment vehicle to save for your child’s higher education. A prepaid college tuition plan allows you to pay some portion of the college tuition fee immediately as per current prices in state colleges or universities.

    The prepaid plan is operated by the state government with a primary objective to help parents’ lock-in tuition fee at current rates to cover the child’s education expenses however does not offer a guarantee to admission. Though it is a flexible plan it also comes with some limitations like the amount invested in this plan can only be used for paying tuition and fee at in-state public universities and cannot be used towards other expenses like the room, books, and board expenses. Not using this money for education purpose may result in attracting penalties.

  4. Coverdell Education Savings Accounts (ESAs): Coverdell ESA is quite similar to the 529 plan where the contributions can be used for your child’s educational expenses. The withdrawals from this plan towards qualified education expenses are completely tax-free. The plan covers all educational expenses throughout the child’s life which includes elementary & secondary education and also the grad school. Some limitations of Coverdell ESA are that the contributions are limited to $2000 per child in a year. And, if the funds are not used until the age of your child is 30 then the earnings /investment may be subject to taxes. The eligibility to participate in the plan decreases for couples earning more than $190,000 a year ($95,000 for singles).

  5. Custodial Accounts: Custodial accounts are another investment vehicle which can help you save funds for your child’s future education. Traditionally, parents used such an approach where they used to put aside some money or invest finances or transfer assets on their child’s account until the child reaches adulthood or the “age of trust termination” (i.e., at age 18 or 21). These accounts are structured as UTMAs or UGMAs or minor’s trustee account. Keep in mind that as soon as your child reaches adulthood, he/she has the right to use the funds as per their discretion, i.e. the child can use the funds for paying their college education or can use the money for any other purpose altogether.

    In a nutshell, as parents, it is essential to learn and understand the pros and cons of various investment alternatives, choose the right option, and invest wisely and regularly which will help you to save for your child’s college education.

If you are unsure of which plan would work best for your unique situation, it is always a good idea to consult a financial advisor and get the right plan in place that would be the most beneficial to you and your children.