If you are thinking about how to save for a college fund, the best advice is to start early and stick to the plan. In today’s competitive job market, the importance of a college degree can’t be overemphasized. The cost of higher education is already high and it will likely keep rising. Knowing the best ways to save for college and starting early can save your child from missing out on their dream career. Without a college fund, students can accumulate substantial student loan debt.
Ways to save for a college fund
Parents want to give their children the best education possible. You can do that by setting aside a little money at a time to cover your child’s future college expenses. There are various options for parents to save for their children’s college funds. Four easy ways to save for a college fund include:
- a 529 college savings account
- a Coverdell Education Savings Account
- a custodial account
- a prepaid tuition plan
Open a 529 college savings account
A 529 plan allows you to contribute to a tax-advantaged investment fund toward covering your child's future education costs. The funds contributed to a 529 account can be invested in a diverse range of securities, including stocks. Withdrawals from a 529 account are tax-free if you're spending the funds on qualified education expenses. You can also see if your state offers tax breaks for 529 contributions.
Open a Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) is similar to a 529 plan. You make after-tax contributions to the account and you never pay taxes on withdrawals from the fund to cover education expenses. However, the Coverdell ESA offers a broader investment option than a 529 plan.
With Coverdell ESA, you can only contribute a maximum of $2,000 annually per child. Also, the Coverdell ESA doesn’t accept contributions for beneficiaries over 18 years of age. You must withdraw all funds from the Coverdell ESA by the time the beneficiary reaches age 30.
Open a custodial account
With a custodial savings plan, you open an account in your child’s name and make contributions to their college fund. The child is listed as the beneficiary and you run the account on their behalf. The child will assume legal control of the funds in a custodial account after attaining the age of majority or 18 years.
There are no contribution limits in a custodial account. Also, there's greater flexibility when it comes to spending funds from a custodial account.
Consider a prepaid tuition plan
A prepaid tuition plan lets you pay for your child's college tuition upfront. With a prepaid tuition plan, you make advance payments for your child’s college tuition costs at a predetermined price.
Usually, prepaid tuition plans have the same tax treatment as a 529 account. However, since the prepaid tuition plan only overs tuition fees, you can pair it with a 529 plan or Coverdell ESA, which can cover other education expenses.
How much does it cost to go to college?
The cost of going to college will depend on several factors. For example, costs will vary whether a student is taking part in a two-year or four-year study program. The costs will depend on whether the student is attending an in-state or out-state university. The cost also varies if the individual is going to a public or private university.
College Board data shows that a four-year study program at an in-state public university costs an average of $22,000 in the 2019–2020 academic year. Similarly, a four-year study program at a private university costs an average of $50,000 in the 2019–2020 academic year.
How much should I set aside per month for college expenses?
Parents usually ask how much money they should save each month toward their child’s college education fund. Factors like a specific college fund account’s contribution limits, the projected cost of completing the desired college program, and the time available to money will determine how much you may have to set aside each month for college.
Finally, individuals should start saving for college expenses as early as possible. Starting early gives you enough time to accumulate funds and makes saving more manageable by spreading out the burden. By starting a college fund early, you may only have to borrow a little money to cover the funding gap.