How to save for college

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College is one of the biggest expenses that parents will face when raising children. The average college education costs a whopping $35,720 a year, so parents can expect to spend more than $140,000 for a four-year college degree absent any student aid or loans.

Like most big expenditures, it pays to plan ahead when it comes to preparing for college costs. The earlier you start to save for your child’s education, the better.

When to start saving for college

The old adage about the best time to start something being yesterday holds true when it comes to saving for college. You should start saving for college as soon as you can. The longer you let your savings stay invested, the more time it will have to compound. Many parents start saving as soon as a child is born and some may start saving even earlier than that.

“A parent, grandparent, guardian or really anybody else who wishes to fund to that child’s future educational expenses should start, in my opinion, right away — if not when they’re born,” says Joseph Voellm, a certified financial fiduciary at JL Smith Group in Avon, Ohio. “This would allow the money to grow and compound over time to meet that future.”

Deacon Hayes, a personal finance speaker and podcaster, advises parents to tell loved ones about their college savings plans. “If you have a birthday party for your kid, one thing you could do is ask for money towards your kid’s college instead of gifts. You could do this by using an app where you would share a link for contributions or simply ask for cash.”

How much to save for college each month

Figuring out how much to save for college is difficult. The costs can vary widely depending on whether a student goes to a public or private university, the amount of financial aid awarded and the cost of living in the area around the school.

Still, calculating the cost of an education is important to determine how much you’ll need to pay for college, Hayes says. “Then you need to determine if you will pay for the whole thing or just a portion of (your child’s) college expenses. This will be helpful in determining how much money you should invest each month in a qualified college savings plan like a 529.”

Though you can’t control all of your children’s choices, one way to make costs more predictable or keep them low is to encourage them to look for scholarship opportunities or ways to live within a budget.

Amanda Clayton, a personal finance blogger, has experience with attending college in a high-cost area. “From personal experience, most of the student loans I’m still paying back 10 years later weren’t due to tuition and fees as much as they were related to lifestyle. I was a first-gen college kid and had no idea how to budget for living expenses,” she says.

“The cost of living element of saving for college is interesting because a lot of your top universities are located in high cost of living areas,” Clayton says. “I used to live in Washington, D.C., where rent is through the roof. I couldn’t afford to live in D.C. on a full-time salary, I can’t imagine being an undergrad in a city like that, footing the cost of both tuition and rent.”

Once you’ve estimated how much your child’s education will cost, you can decide how much to save. Some experts recommend saving only one-third of the expected costs. The remaining two-thirds can be paid over a lifetime through loans, grants and future income. However, you can aim to save more or less depending on your personal preferences.

What are the types of accounts for saving for college?

When it comes to saving for post-secondary education, there are lots of different accounts you can use. These are some of the best options.

Traditional savings account

Everyone should have a savings account. They’re great for keeping money safe over the short term, but for college savings, they’re a pretty poor choice. The interest paid on savings accounts is typically below inflation, so even if your money is safe, it is constantly losing purchasing power.

529s

A 529 is a tax-advantaged account that is designed to help pay for college. You won’t pay taxes on money withdrawn from a 529 so long as you use it to pay for educational costs. Some states even offer tax benefits when you add money to the account, further sweetening the deal.

529s are a great option for people who are certain their child will go to college. The tax benefits and investment options mean your savings can grow over time. However, there are penalties for withdrawals used for non-educational costs, so you could get hit with penalties if your kid skips college or earns a full ride and doesn’t need the savings. That’s why many parents consider other options.

Coverdell education savings account

Coverdells are an alternative to 529 accounts. They are more restrictive than 529s when it comes to contributions, allowing you to add just $2,000 to the account each year and only allowing contributions on behalf of children under 18.

However, Coverdells are more flexible when it comes to withdrawals. You can use the money for tuition and fees as well as expenses like tutors, uniforms and other costs related to K-12 education, in addition to college expenses.

Prepaid tuition plans

Some state universities let parents prepay their children’s tuition, purchasing future credit hours at a predetermined price. If you know that your child will go to an in-state school, this plan lets you pay for school over many years without having to worry about investing, stock market swings or increasing education costs.

The obvious drawback is that these plans assume your child winds up going to an in-state school. If they want to go somewhere else, you might have to jump through some hoops to get the money transferred to the university they choose. Additionally, not all schools offer prepaid tuition plans.

UGMA and UTMA accounts

UGMA and UTMA accounts let adults give money to minors without giving the child full control over the funds until they reach the age of majority. For tax purposes, the money placed in these accounts is treated as a gift to the child and the child’s property. However, the parents can retain control over the money and how it is used or invested.

In these accounts, a portion of the gains is tax-free, part of it is taxed at the child’s income tax rate and the remainder is taxed at the parent’s income tax rate. Plus, there are no restrictions on how the funds may be used as long as they directly benefit the child. That means they can be used for non-college expenses, if your child chooses not to pursue higher education.

The drawback is that your child will get full control over the money when they reach the age of majority in your state — from 18 to 21. They can use the money for anything they want, which gives them the chance to squander it.

Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Wealth editor