10 Saving for College Tips for Parents (And What to Avoid)
Everything is more expensive these days: groceries, utilities, gas, and especially the cost of a college education. Let’s look at the current price tags. A four-year public college education is coming in at about $10,560 on average per year for tuition. The College Board puts the price of tuition at a four-year private college at $37,650 on average.
Discussing the cost of education can seem overwhelming. You’re probably asking, “Where do I begin? When is a good time to start saving for my child’s education? How much do I need to save?”
First and foremost, know it’s never too late to start saving, but the sooner you sock money aside, the better off you’ll be. The experts have tips on saving for college to share, including traps to avoid.
Saving for College Tips From the Experts
If you’re trying to save up for your child’s future education, experts share their top 10 penny-pinching tips.
- Invest in a 529 account – This is by far the most popular option for parents to begin a savings program for college. The 529 is an investment plan, usually sponsored by state governments, solely for the purpose of future educational expenses, which also include K–12 tuition, student loan payments, and apprenticeship programs. They’re typically tax-friendly, which means you won’t have to pay taxes on the earnings as long as you use the funds to pay for qualified education expenses.
- Savings bonds – Putting money into eligible savings bonds is a low-risk education savings option; and federally guaranteed. Plus, the income from their annual gross income can be excluded for tax purposes. Once redeemed, the money can be used for higher education, excluding room and board. Savings bonds generally have a low rate of return and can take up to 20 years to fully mature.
- Coverdell Education Savings Account – Experts say this is a tax-deferred trust account that can be used to pay for elementary, secondary, and higher education expenses, including room and board. Accumulated earnings and distributions are tax-free when used for education. However, you can only contribute up to $2,000 per beneficiary each year.
- Roth IRA – Investment specialists say this is a way to invest after-tax dollars with a tax earnings shield when specific distributions are made.
- Custodial account – Parents will often utilize savings accounts called UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). These types of accounts can hold assets like cash, stocks, and mutual funds. It has no limit for contributions. However, once the child turns 18, the account becomes their property, and they get complete control over how the money is spent.
- Mutual funds – This is an option to consider because there is no limit on your investment, and it is not designed specifically for college, so it can be used for other purposes. Earnings are subject to annual income tax, and capital gains will be taxed when shares are sold, which can affect your child’s financial aid eligibility.
- Life insurance policy – Taking out a life insurance policy to be used for college is usually an option used by higher net worth families for tax advantages. Experts say this permanent life insurance policy is a conventional life policy, with some of the premium money going toward a death benefit and some of the funds going into a tax-deferred savings account.
- Home equity loan – Using your largest asset, your home, is an option to pay for college. Often families feel that paying down the mortgage is a way to use the equity as a savings plan.
- FAFSA – Although the Free Application for Federal Student Aid (FAFSA) is not a strategic early savings plan, once your child begins applying to colleges, it’s a good idea to complete the FAFSA each year your child will be in college. Most students will qualify for some form of financial aid, including grants, scholarships, student loans, and work-study. The FAFSA form is also required to be on file for most institutional scholarships.
- Savings account – This is a good opportunity for your child to learn the value of saving money. Open an account for your young child to begin tucking away money of their own from gifts, allowance, and part-time jobs as they grow up. Most banks will waive monthly fees and minimum balances for student accounts.
These are some tips on saving for college, but there are a few things to avoid as well.
What to Avoid When Saving for College
First and foremost, don’t put off saving because you think you must save a lot of money all at once. Here are some saving tips to get you started:
- Use automatic bank transfers or payroll deductions to set up your savings plan and make it part of your monthly budget.
- Start small and increase the savings when you can. It only takes $25 and a few minutes to open an NC 529 Account and start saving today!
- If you think you can stop saving because you’ve put enough away, be careful. Experts say you should aim to save for at least a year and a half of college costs.
- Don’t stop contributing to the NC 529 Account when your child enters college. Those contributions turn around to provide a tax break on earnings used to pay for education expenses. Any leftover funds can be used to repay student loans or transferred to a sibling for their education.
The bottom line, the earlier you can start saving for your child’s education, the better off you’ll be when your child hits campus. Getting a college education takes planning and commitment. NC 529 is here to get you started.