Here on this blog we’ve mentioned many times that the people that do the best in retirement are the ones that start saving early. The same thing could definitely be said when it comes to saving for your child’s college tuition. The simple fact is that the earlier you start socking away money to pay for college the more you’re going to have when they finally get there.
If you’re the parent of a young child and you’re wondering what to do and where to start, you are certainly not alone. When you consider that the cost of going to even a local college can be upwards of $8000 a year you realize that paying for college is not something you’ll be able to do with your regular paycheck.
Here’s the good news though. Even if you don’t earn a lot of money it doesn’t take a lot of money to fund your child’s college. For example, if you put $50 a month aside from the time that your child is born and you invest it somewhere that it can receive a 7% return, by the time your son or daughter is 17 you’ll have $20,000. Put $200 a month in the bank and that number increases to a significant $80,000, enough to pay for a pretty darn good school.
Of course the trick is finding something that will give you a 7% return. There are a number of options that you have and we’re going to take a look at a few of them right now.
Similar to a 401(k) or an individual retirement account, a 529 College Savings Plan will allow you to save money for your child’s education through a moderate variety of tax-free investment options. The good thing about a 529 College Savings Plan is that it’s usually handled automatically (direct deposit), there are a few restrictions and it will not impact financial aid. There are sometimes other tax breaks as well. These funds are restricted to higher education however and can go up and down with the stock market. There are also some enrollment and maintenance fees.
U.S. Treasury bonds are savings bonds that are issued and insured by the federal government and also they are exempt from all state and local taxes. These have quite a bit less risk than anything tied to the stock market and they are in general relatively inexpensive. They come with a number of tax advantages if they are used for college tuition and your family is under the income limits. They do have a penalty if you withdraw the funds early however and it’s unlikely that they will be able to keep up with the rising cost of tuition.
A Custodial Account is an account that can be opened at a bank, a mutual fund firm or a brokerage. This account is then managed by an adult for their minor child who is under the age of 18. This kind of account is good for a number of options including paying for college, paying to go to a summer camp or even paying for a new automobile and, since it’s tied to the child’s Social Security number, it has a number of tax advantages as well. On the downside, it’s also risky because it’s tied in with securities and, once the child reaches adulthood, the amount is automatically transferred to them. (This can be good or bad depending on the child.)
Lastly there is the Coverdell Education Savings Account, a tax-free account that can be created for the purpose of paying for education expenses. These also come with contribution and distribution limitations. The best thing about these is that growth and withdrawals are not taxed, there’s a bit more control over how the money is invested and its use is not confined to paying for college. There’s a contribution cap of $2000 per child however and a number of qualifications that need to be met, as well as the fact that contributions can only be made until the child’s 18th birthday.
No matter which of these college savings programs or plans that you decide to use, the one point that should be stressed above all others is the need to start saving as early as possible. The earlier you start saving, the more money your child will have two blow at college on keg parties and beer bongs. Pardon us, we meant studying, working hard and making their parents proud.
Just make sure you start saving as early as possible. Best of luck.