Saving for your child's college education can seem like a daunting task, but it's important to start early and make a plan. The good news is that there are many ways to save for college and if you start saving for your child's education now, you can help to manage your worries about the future and be ready for whatever comes. Here's what you need to know.
How much does college cost?
The cost of college has been rising steadily for years, and there's no end in sight. According to The College Board, the average cost of tuition and fees for the 2021-2022 school year was $38,070 at private colleges, $10,740 for in-state students at public colleges, and $27,560 for out-of-state students at public colleges. And that's not even counting room and board, books, and other expenses.
When should you start saving for your child’s education?
The sooner you start saving, the better. It's never too early to start saving for your child's education. Even if your child is still in diapers, you can start setting some money aside each month. The sooner you start saving, the more time the money has to grow, and the less you'll have to contribute each month.
How much should you save for your child’s education?
There's no magic number, but a good rule of thumb is to save enough to cover half of your child's anticipated college costs. So if you think your child will need $50,000 for college, you should aim to save at least $25,000. Of course, the more you can save, the better. But even if you can only save a few thousand dollars, it will still make a big difference.
[H2] 8 ways to save money for your child's education
Open a 529 plan
Open your own savings account
Education IRA account
Coverdell Education Savings Account
Put money in a custodial account
Ensure you have sufficient income protection or life insurance
Look into grants and scholarship
Teach your kids to budget and save for their future
1. Open a 529 plan
A 529 plan is a savings plan designed to help families save for college. The money can be used for tuition, room and board, books, and other qualified expenses. This type of plan is sponsored by states or educational institutions, and the money is invested in an account that grows over time.
When the time comes to pay for college, the money can be withdrawn tax-free. In some cases, the earnings can also be deducted from state taxes. Overall, 529 plans are a great way to save for college, and they can be used at any accredited college or university in the United States. Note that there is a 10% penalty for withdrawals used for non-qualified expenses, so be sure to use the money for its intended purpose.
2. Open your own savings account and put money away each month
If you're not able to open a 529 plan, or if you want to supplement your savings, you can open a savings account in your own name. You can contribute as much or as little as you want each month, and the money will grow tax-deferred. You can use the money for any purpose, including college expenses, but you'll pay taxes on the earnings when you withdraw the money.
3. Education IRA account
If you have young children, you can save for their future college education with an Education IRA account. You can contribute up to $2,000 per child each year, and the money grows tax-deferred. Withdrawals from the account are tax-free as long as they're used for qualified education expenses.
4. Coverdell Education Savings Account
The Coverdell Education Savings Account is another tax-advantaged way to save for college. Contributions are not tax-deductible, but the money grows tax-deferred and withdrawals are tax-free as long as they're used for qualified education expenses. You can contribute up to $2,000 per year per child, and the money can be used for elementary, secondary, or post-secondary education expenses.
5. Put money in a custodial account
A custodial account is a financial account that is set up for a minor child. The money in the account belongs to the child, but a parent or guardian manages the account until the child reaches the age of 18. One of the biggest benefits of a custodial account is that the money grows tax-free. In addition, custodial accounts are relatively easy to set up and there are no special fees or requirements.
6. Ensure you have sufficient income protection or life insurance should the worst happen
Income protection insurance pays out a regular income if you can't work because of sickness or disability. Life insurance pays out tax-free money, often paying off your mortgage and giving an 'income' to your family if you suddenly die. No one likes to think about these aspects of financial management, but good insurance policies are a way to ensure that the plans you have for your family can still go ahead if the worst happens.
7. Look into grants and scholarship
One of the best ways to pay for college is to get money that doesn't have to be repaid. There are many grants and scholarships available, and you can find them by searching online or talking to your child's guidance counselor. The key is to start early and search diligently and ensure the required applications and essays are completed and submitted on time. To find a scholarship, simply start by contacting the financial aid office at the school your child is planning to attend. They can help you locate scholarships for which your child may be eligible.
8. Teach your kids to budget and save for their future
It’s important to ensure that your child is financially savvy before large sums of money (like student loans) go into their accounts. This means teaching them the value of money, how to budget, earn more and save long before leaving home. This will minimise the need for extra loans from the bank of mom and dad, and keep their debts to a minimum.
The best way to do this is by giving them allowance from a young age so they learn the central tenets of financial literacy.
At the same time, get them involved in saving for their future by talking to them about costs and long-term saving goals.
Money Missions on the GoHenry app can also help boost their financial literacy while they can budget and set savings goals within the app.
No matter what stage of life your child is in, it's never too early or too late to start saving for their future education. By taking small steps now, you can make a big difference in the amount of debt they'll have to take on later. And by giving them a head-start in their financial education, you'll set them up for a bright financial future.