Paying for your child’s college tuition is not an easy task. College is not a cheap option – in 2020, the average tuition cost at a 4-year private school was $37,650, and that number has continued to push even higher.
Therefore, if you’re planning on sending your child to college, you’ll want to start a college fund as soon as possible. Some people even start these funds as soon as their child is born!
The earlier you start saving, the more money you’ll have to pay for tuition and other costs, like accommodation, textbooks and other costly college-life supplies and activities.
- If you’re looking to send your child to college, starting a college fund is a good idea to help pay for it.
- In 2020, the average tuition cost at a 4-year private school was $37,650 per year.
- There are lots of different savings plans, such as the 529 plan, ESA’s, IRA’s and UGMA accounts.
- You could, instead, encourage your child to pay for college their own way.
- Scholarships, aid and grants are all often available and will help your child pay for their college tuition.
College Savings Options
The 529 plan’s name comes from an IRS code section specifically allowing adults to save for college in the name of a child.
The 529 plan has tax benefits; the investment earnings from the account grow free of federal taxes if used for qualifying college expenses. The person funding the account pays taxes on the money before it’s contributed to the 529 plan. States sponsor 529 plans that may also have tax advantages to state residents.
These accounts can be opened to benefit a student who isn’t the donor’s child, and unused funds can be designated for another student at a later time.
Education Savings Account (ESA) or Education IRA
An ESA works a lot like a Roth IRA, except that it’s for education expenses.
The ESA allows you to invest up to $2,000 (after tax) per year, per child. Plus, it grows tax-free!
For example, if you put away $2,000 a year starting when your child is born, by the time they turn 18, you would have invested $36,000. It’s hard to say exactly what the rate of growth is with an ESA because it varies based on the investments in the account. But at the average stock rate of 12%, that $36,000 would grow to around $126,000 by the time the child starts school.
The ESA account will likely provide a much higher rate of return than you’d get in a regular savings account—and you won’t have to pay taxes when you withdraw the money to pay for education expenses.
An ESA isn’t just for college tuition either. It can be used for K-12 private school tuition, vocational school or things like textbooks, school supplies or tutoring If your child doesn’t end up needing it, you can transfer the money to a sibling for their school.
The Uniform Gift to Minors Act is a custodial account, which means your child or the minor for whom you create the account can own investments like stocks and mutual funds. This account gives them the assets but allows the custodian to control them until the minor reaches legal age.
This isn’t considered a traditional college fund because the money doesn’t grow tax free. Also, it counts against the student and parent when applying for college financial aid, thus reducing the amount of financial aid that the school may offer your child.
Bank Savings Account
Traditional bank savings accounts are another option you can consider, but they’re not explicitly suited for educational purposes. Fees and requirements differ from institution to institution.
Still, generally, funds can be accessed at any time for anything without a penalty — as long as the account sits at the required amount and there aren’t more withdraws than specified in the terms.
Return on interests are typically lower than 1%.
Tips to Fund Your Own College Education
Ultimately, college is not a right; rather, it is a privilege – the overall student loan debt in America is nearly $1.6 trillion! Whilst most of us want our kids to pursue a degree, it doesn’t mean it’s our responsibility to pay for it. It’s totally fine for them to take some ownership in their education. Even though your child is a full-time student, there’s no reason they can’t start building up their own savings fund. At the very least, doing this will help establish healthy money habits they’ll carry into the future.
1. Apply for Aid
Everyone who wants to go to college should fill out the Free Application for Federal Student Aid, or FAFSA. It’s a form schools use to figure out how much money they can offer the student. It covers things like federal grants, work-study programs, state aid and school aid—all different bundles of free money! But beware: The FAFSA also covers loans, however, so, when an award letter arrives, read the fine print to make sure it’s a scholarship or grant—not a loan.
2. Take AP Classes
Advanced Placement (AP) classes give high school students the opportunity to earn college credits while they’re still in high school. Every AP class taken in high school is one less class you’ll need to pay for in college. Hallelujah! Tell your child to talk to their academic counselor for more information.
3. Apply for Scholarships
It’s free money for college that you don’t have to worry about paying back (and we like that). If your child excels in athletics, academics or extracurricular activities, they should try to get rewarded for it. Encourage your child to apply for any scholarship they’re eligible for—even the small ones add up fast!
4. Open a Savings Account
If your student is serious about building up their college savings, they’ll need a safe place to keep all that money. Most banks offer accounts specifically for students, which usually means waived monthly maintenance fees and no minimum balance requirements. If your child is under 18, you’ll need to be the joint account holder.
5. Save instead of spending
If your child gets birthday money or an allowance, suggest that they put it right into their savings account so they aren’t tempted to spend it.
6. Get a job
Whether they take on a full-time gig during the summer or a part-time job during the school year, your child will be able to save money for college and gain work experience to put on their resumé.