Best Ways to Save for your Child’s Higher Education
Benjamin Franklin, one of the founding fathers of America, rightly said –
An investment in knowledge pays the best interest.
From the day you become a parent, everything in your life revolves around the betterment of your child. And yet, unfortunately many American parents do not put in enough thought towards their child’s education fund. The Federal Reserve Bank of New York recently quoted that the average student loan debt in America stands at $1.3 trillion. That is a huge burden to put on your child! Fortunately, with proper planning and savings, parents can contribute to their child’s education and save them from student debts.
When saving up for your child’s higher education, keep in mind that college expenses are likely to go up every few years. Tuition fees could be double of what it is now. Calculate the time left for your child to go to college and make sure to accordingly account for inflation when setting goals for a college fund. Use a calculator to help you!
7 Best options to save for your child’s higher education
1. Coverdell Education Savings Account (ESA)
An education savings account is one of the most common saving methods used by parents. You can save up to $2000 every year for each child in an ESA. This means if your parents are putting in $1000, you can contribute another $1000, as long as the total amount doesn’t exceed $2000. The interest in an ESA is higher than a savings account. The biggest benefit of having an ESA is that your withdrawals are tax-free. However, keep in mind that ESA money can only be used by the beneficiary up to the age of 30.
2. 529 plans
529 plans are a great way to save up for your child’s education and yet, unfortunately, aren’t so popular. A 529 plan offers tax-free growth and withdrawals. Different 529 plans come with different fees and operating costs, so it is good to research thoroughly before you finalize a plan. 529 plans can also be used by grandparents, but make sure you take a plan that is easy to manage.
Another feature of the 529 plan is the prepaid option. The upside of the prepaid plan is that you can buy tuition credits at a college of your choice at the current fees and not have to wait until your child goes to college. This is a great way to combat inflation but can be tricky if your child decides to go to another college. Discuss such options with your children before taking them up.
3. UTMA or UGMA plans
UTMA or Uniform Transfer to Minors Act and UGMA or Uniform Gift to Minors Act, are both custodial accounts or trusts that you can set up for your child. These accounts cover more than just college fees and can be used for any other expense by the beneficiary. Custodial accounts can be used to save bonds, stocks, and liquid cash for your children. UTMA and UGMA accounts can be set up in your child’s name but need a custodian like a parent or a grandparent till your child turns 21. But be careful when setting up a UTMA or UGMA account, because once the beneficiary turns 21, it is solely up to them how they want to use this money. If your children are spendthrifts or likely to misuse the money, then this may not be the best option for you. Apart from investing your money in these investment vehicles, there are several other things that you can do to save up for your child’s higher education:
4. Involve your children
If your children are now teenagers and old enough to work, let them contribute to their college fund. Not only do part-time jobs help in funding their education, but they also make for great additions to their college essay!
5. Include the possibility of scholarships
If your child excels at sports, co-curricular, academics, etc., encourage them to apply for college scholarships. Scholarships can significantly reduce the load of financial expenses from a college education.
6. Take Advanced Placement classes
AP classes are classes that children can take in high school and earn credit for college. The AP class your child takes in high school is one less class they have to take in college. It is not advisable to burden your children with additional classes. However, if they have extra time, you can talk to the school’s academic counselor and have them enrolled in some of these classes. You can also discuss the options of dual credit at your child’s high school.
7. Be realistic with your dreams
Not all scholars or millionaires graduate from Ivy League colleges. If you are not able to meet a particular college’s tuition, opt for a community college that has a lower tuition fee. You can later transfer these credits to the college of your choice.
To sum it up
As they say, the roots of education are bitter, but the fruits are sweet! Saving up for a child’s education fund can seem challenging, but it is not impossible and surely comes with many long term rewards. With the right goals and techniques, you can steer through and give your child the chance to get the education of their choice.
Are you struggling to meet the goals you set for your child’s education? Reach out to financial advisors. They are skilled enough to help you save your money in the most appropriate education fund account.