Authored By Diédre Barret – Senior Vice President of Sales and Marketing for Guaranty Bank.
The price of higher education has never been higher, and the average cost for just one year of tuition, room, and board at a public in-state school is over $20,000. At the same time the U.S. Department of Education reports that a college education is a “necessity for individual economic opportunity.” Knowing how essential it is – but how expensive it is – saving for college is a must. Here’s how to start a college fund and still keep up with your other expenses.
First things first
The best way to begin saving for college is simply to begin. It’s easy to get caught up in everyday expenses and emergencies and to keep putting college savings off. It’s also easy to rationalize that college could still be years and years away. But, those years will go by quickly.
To be ready, first make sure you’re in the best position to save. Pay off any outstanding debt first, and aim to have an emergency fund of three to six months to cover any unexpected costs. By doing this you won’t be tempted to “borrow” from a future college fund going forward. After this is set, then get in the habit of putting some amount of money away every month, even if it’s just a small deposit. It will add up over time!
Set up the right account
In addition to traditional savings accounts, there are accounts specifically designed to save for college.
- Education savings account. One popular savings mechanism is an Education Savings Account. This plan allows families to contribute up to $2,000 per year on behalf of an eligible student under the age of 18. The advantage of this account is that it grows tax-free. You put away up to $2,000 per year, per child, after taxes. That money is invested through the account to grow more aggressively than with a traditional savings account. Then the money can be withdrawn tax free to pay for qualified education expenses. Another advantage of the ESA is that funds can be used for education expenses before college, such as for K-12 private school.
- 529 Plan. Another option is a 529 Plan. This account lets you save up to $300,000. This option also lets you grow your balance tax free, and quality 529 accounts will give you the option to transfer the funds to another child or beneficiary in the event your child chooses not to go to school.
529 Plans are typically College Savings Plans that function like a Roth IRA. They work by investing your after-tax contribution in mutual funds or similar investments. Much like other investment accounts, the value of your 529 will go up or down depending on the account’s performance.
529 Plans can also be Prepaid Tuition Plans, which allow you to pay the tuition of a participating in-state public college in advance. The benefit of these plans is that you can “lock in” at the current tuition rate. The downside is that most prepaid tuition plans only cover tuition, and not room and board.
- UGMA or UTMA. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) provide the ability to create a “general” savings account for minors. Then when they reach a certain age, they can withdraw the funds to be used for college education, or for other pursuits such as a down-payment for a house. The benefit of these accounts is that they are not limited to a college fund. Another benefit is that invested funds are not taxed at the parent’s income level. A portion is not taxed at all, and subsequent funds are typically taxed at a lower rate for minors.
Get the kids involved
Finally, remember that kids and teens can be empowered to start planning for college financially, as well. Savings accounts can be opened at any age. Students can also take Advanced Placement (AP) courses that can earn college credit before they graduate high school. They can also aggressively pursue scholarships and grants to help bring costs down.