Every parent wants to be able to support their child through every opportunity that comes their way, and oftentimes this includes higher education
. As most people know, the cost of college can be extremely expensive these days, so knowing when and how to begin saving for college is very helpful.
How to start saving for your child’s education.
How much should you save for college?
- Start early. Begin saving for your child’s education as soon as possible. Give that college fund a chance to earn interest and grow before your child is ready for school.
- Don’t overlook your own financial needs. Ensure your financial needs and obligations are taken care of before you move money into your child’s education fund. Be sure you’re saving for your own retirement and maintaining an appropriate emergency fund for your family. You should also ensure you’re keeping up with any student loan payments you might have and you should consider paying off any high-interest debt you might be carrying. After your finances are taken care of, you can put any extra funds towards your child’s education.
- Save automatically. Set up automatic transfers from your main bank account to your child’s education account. Daily expenses can add up, and it’s easy to skip a month of contributing college funds if you’re not putting the money aside automatically. Automatic transfers can help your child’s college fund grow over time, without you having to manually deposit large, lump sums of money every once and a while.
- Reevaluate your contributions as your expenses change. Your baby will outgrow diapers and daycare, which will give you a little more room in your budget. When you eliminate certain expenses from your budget, consider investing that money into your education fund.
The amount of money you will ultimately need
for your child’s college education will depend on several factors
such as which school they will attend, whether they're eligible for scholarships
, how long it will take them to complete their degree, and more. However, looking at the average annual cost of tuition
can be a good place to start.
For the 2022-2023 school year, the average costs of tuition and fees were:
- Public in-state: $10,950
- Public out-of-state: $28,240
- Private nonprofit: $39,400
The U.S. Department of Education’s College Affordability and Transparency Center
can also help with gauging how much to save for your child’s college education.
How should you save for college?
There are many options you can use to help save for your child’s education. It’s best to consult with an investment professional
to talk through your goals and current financial situation so they can help you find the best type of account – or accounts – for your individual needs. Some options include:
1. Regular Savings Account
A savings account at a bank or credit union could be an option to consider as part of your college planning. Consider a high-interest savings account so the funds you deposit can grow even faster. With a traditional savings account you won’t risk losing the money you deposit, no matter how the economy behaves. Furthermore, most banks are FDIC-insured, meaning that even if the bank fails, your money is still protected – usually up to $250,000 per depositor. However, some banks offer additional protection beyond FDIC limits. At BankFive for example, all deposit accounts are protected by DIF insurance, as well as FDIC insurance, which means that even if you have more than $250,000 in your account, the money will still be protected.
2. 529 Plan
One of the most popular savings tools for higher education is a 529 plan. 529 plans are offered by individual states and state agencies, but you don’t have to select your state’s plan. Some states do offer tax incentives for contributing to an in-state plan, but it’s also worth considering the fees and net performance associated with out-of-state plans. 529 plans are investment accounts, and returns are not guaranteed. There is no limit to the amount you can contribute to a 529 plan in a given year, however contributions are considered “gifts” for federal tax purposes, and in 2022 any gift amounts in excess of $16,000 per beneficiary are subject to the Gift Tax. The funds in a 529 plan can be used to pay for qualified education expenses including tuition and fees, room and board, meal plans, books and supplies, and more. While the withdrawals from a 529 plan are tax-free when used for these types of qualified education expenses, any withdrawals used to pay for non-qualified expenses will be subject to taxes and a 10% penalty fee.
3. Coverdell Education Savings Account
Another college savings option is a Coverdell ESA plan. Like a 529 plan, a Coverdell ESA (also referred to as a CESA) is an investment account with no guaranteed returns. You can only contribute to a Coverdell ESA account if your adjusted gross income is below a certain amount, and you can only contribute up to $2,000 per year, per beneficiary. Like a 529 plan, withdrawals made from a Coverdell ESA for qualified education expenses are tax-free, but non-qualified withdrawals are subject to income tax and an additional 10% penalty. The main benefit a CESA has over a 529 plan is that you have more control over where your money is invested with a CESA than you do with a 529 plan.
The earlier you start saving for your child’s education, the more likely you’ll be to achieve your savings goal, and the less stress you’ll have when it comes time to pay that first tuition bill. Knowing your options is the first step in determining what plan will best fit your family’s financial situation. Remember that even if you only have a small amount to save at first, anything can add up over time.
If you’re interested in learning more about education planning, contact us today, or get started with our handy college savings calculator.