Every parent dreams about having a child attend college. However, soaring tuition costs and rising inflation are making it harder for many families to afford the full cost of higher education. It’s never too early to start saving for college, but putting money aside effectively takes planning and discipline. While there are many options open for parents interested in saving for their kids’ further education, the choices you make today can have big implications down the line.
So, let's look at some important questions – like when you should start saving for college and how much you should look to save. We also consider the pros and cons of several of the best ways to save money for college.
Get Schooled: How to Save Money for College
Giving your kids a college education is the best way to set them up for future success. Here’s what you need to know about saving for school.
How Much Should You Save for a College Education?
The average cost of attending college in the U.S. has doubled since the turn of the 21st century, according to the Education Data Initiative (EDI), an independent research group. EDI’s data shows that the average annual cost of tuition alone for an in-state student at a public institution is now $9,678, and $27,091 for out-of-state students. Tuition and fees at private colleges average $38,768.When you add in the rapidly rising cost of living—including room, board, and other expenses— EDI estimates the annual cost of attending an in-state public university at $26,027. That’s over $100,000 for an in-state four-year degree. Assuming prices continue to rise at current rates, the New York Times estimates the cost could escalate to almost $185,000 by the time a newborn today is ready to head to college.
What Can You Do to Lower the Cost of College?
Most college students are eligible for some form of financial assistance to help lower tuition, while many also apply for scholarships that can potentially cover some or all college costs. Many students also opt to start their academic careers at community college, earning a two-year associate degree that allows them to transfer into the third year of most bachelor’s programs. Here are some other things you can do to lower college costs:
- Take care of your high-interest debt first. That includes credit cards as well as auto and personal loans. Reducing what you owe on these is the best way to free up money for your college fund.
- Check whether your workplace offers any employer-sponsored college savings benefits. In some cases, employers match the money you put towards college savings or even provide a lump sum contribution of their own.
- Find out if your state offers a college tuition prepayment plan. These plans allow you to lock in current tuition rates by paying a portion of the expected costs up front. Some institutions offer their own prepayment plans. With tuition costs likely to double in 20 years, it’s a good way to save.
While you may not be able to save enough to cover the full cost of a degree, every bit that you do put away will make it easier for your child to attend school and reduce their need to depend on student loans to pay for college.
When Should You Start Saving for College?
The answer is, of course, as early as possible. While some families are able to start saving for college from the birth of their child or even before, many of us lack the means to set money aside, especially in the early stages of raising a family. Instead, recognize that while the “best” time to start saving might have been some years ago, you can still start right now, even if your child is already in high school. Below we’ll take a look at several options to begin saving for college and consider which makes the most sense for where you are in your financial journey.
7 Ways to Save for a College Education
Let’s take a look at some of the most common ways parents can save for a child’s college education and their relative pros and cons.
1. Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs (also known as education IRAs) are offered by many banks and credit unions. These accounts allow you and other family members, including grandparents, to contribute up to $2,000 a year towards education costs. While contributors must meet certain income restrictions, savings grow tax free. Withdrawals are also not subject to tax provided they are used for approved educational purposes, which includes many college expenses.
Pros of Coverdell ESAs
- Tax-free growth and withdrawals add up to big savings over time
- Extended families can work together to support a child’s education
- Unused funds can be transferred for use by another child
Cons of Coverdell ESAs
- Annual contributions are capped at $2,000
- Contributions to a Coverdell ESA are not tax deductible
- Income restrictions may limit potential contributions
- Funds must be used by the time the beneficiary reaches the age of 30
2. Share Certificates
Share certificates, available at banks and credit unions, allow you to put away savings for a set period of time in return for a guaranteed return on your investment. Your money is also fully insured against loss in the same way that savings and checking accounts are. This makes share certificates among the safest and most predictable ways to grow your money. Radiant Credit Union offers both fixed- and variable-rate share certificates with terms of between six months and five years with a minimum deposit as low as $1,000. By consistently investing and reinvesting money into share certificates, you can build modest savings into a significant lump sum to use for college costs or any other expenses.
Pros of Share Certificates
- Almost no risk of losing your money
- Guaranteed returns on your money
- Savings can be used for any purpose
Cons of Share Certificates
- Interest rates are lower than other higher-risk investment options
- You cannot access your money until the certificate matures
- No tax advantages
3. Savings Accounts
A savings account is a great place to start building a college nest egg for your child. Money in your savings account is separate from your daily expenses but immediately accessible if you need it. You can open a savings account at any bank or credit union. Opening balances are typically low and maintenance fees are minimal. Some savings accounts even focus on helping kids learn how to save for future needs, including their education. Radiant Credit Union’s Future Endeavors Savings Account aims to set up young savers for success with a low minimum balance and a higher dividend rate than a regular savings account, plus no monthly account fee. Radiant also offers several other options for families looking to save for college including:
- Our Even Up Saving Account, which rounds up savings from your spare change
- Our Money Market Savings Account, which offers higher dividends on higher balances
- Our Special Share Account, which allows you to set funds aside for designated expenses
Pros of Savings Accounts
- Easy to open and manage
- Low minimum balances
- Easy access to funds (subject to withdrawal limits)
- Savings can be used for education or any other purpose
Cons of Savings Accounts
- Lower interest rates than most other investment options
- Some withdrawal limits may apply
- No tax advantages
4. Individual Retirement Accounts
Despite the name, both regular and Roth individual retirement accounts can be used for certain education purposes if necessary. That makes them a good way to plan ahead for possible college expenses while also providing for your own retirement. Roth IRA savings can be withdrawn penalty-free and tax-free for qualified education at any time. Traditional IRA savings can be withdrawn penalty-free below your retirement age of 59½ for qualified expenses, but you will be subject to taxes. Radiant Credit Union offers both traditional and Roth IRAs through our Retirement Central service.
Pros of IRAs
- Prepare for college while planning for retirement
- Tax-advantaged growth (traditional IRAs)
- Tax-free withdrawals (Roth IRAs)
Cons of IRAs
- Early withdrawal limits (traditional IRAs)
- Reduction of your retirement savings
- Limited annual contributions
- May affect eligibility for needs-based financial aid (Roth IRAs)
5. 529 Savings Plans
529 savings plans are offered by many states to help families plan for the costs of attending college. Unlike Coverdell ESAs, 529 plans have no limit on contributions, plus savings grow tax free and can be withdrawn for approved college expenses with no tax penalty. 529 plans are also managed more like investment funds than bank or credit union deposit accounts, offering potentially higher returns. Contributions to a 529 plan are subject to federal taxes but might benefit from state tax exemptions or credits.
Pros of 529 Plans
- Tax-free growth and withdrawals
- Higher contribution limits
- Professionally managed investment options
- Possible state tax deductions or credits
Cons of 529 Plans
- Savings must be used for qualified education expenses
- Relatively limited investment options
- Some administrative fees and expenses
6. Investment Accounts
You can choose to invest savings on the open financial markets in assets like stocks, bonds, or mutual funds. An investment account can provide potentially higher returns than either savings accounts or more conservatively managed 529 plans. However, investing your funds in the open market also comes with a real risk of losing both your earnings and your original investment. You will also be subject to capital gains taxes on your earnings.
Pros of an Investment Account
- Higher potential rates of return
- Flexibility to choose investments according to market conditions
- Access funds when you wish
- Spend earnings on educational costs or any other expenses
Cons of an Investment Account
- Risk of losing investment earnings and principle
- Need to monitor market conditions
- No tax advantages for education savings
7. Custodial Accounts
Custodial accounts, also known as UTMA (Uniform Transfers to Minors Act) accounts or UGMA (Uniform Gifts to Minors Act) accounts, allow you to save and invest money on behalf of your child. Your child then takes full ownership of the account at age 18 or 21 (depending on your state). Custodial accounts can be opened in your child’s name at some banks and credit unions, as well as through brokerage firms and other financial institutions. Funds are invested in savings accounts, share certificates, stocks, bonds, or mutual funds, depending on the institution. You can invest as much as you like in your child’s custodial account, but there are no tax advantages to your contributions. However, your child may benefit from a lower tax rate when they choose to withdraw money. Remember, however, that your child will take full control of the account one day, with no obligation to spend the money on education-related expenses!
Pros of Custodial Accounts
- No limit on contributions
- Wide choice of investment options
- Potential tax advantage on withdrawal
Cons of Custodial Accounts
- Taxes on contributions and account earnings
- Loss of control once beneficiary takes over the account
- May affect eligibility for needs-based financial aid
The following table compares some of the most important features of these popular savings options.
|Savings Product||Offered By||Interest||Risk||Tax Advantages||Spending Restrictions|
Credit unions, brokerages
|Variable (low to moderate)||Low to moderate||Tax-free growth and withdrawals expenses||Qualified education expenses|
|Fixed (low to moderate)||Low||No||No|
Credit unions, Financial institutions
|Variable (moderate)||Moderate||Tax-deferred growth; tax deduction for contributions||Qualified education expenses|
Credit unions, Financial institutions
|Variable (moderate)||Moderate||Tax-free growth; no tax on qualified withdrawals||Qualified education expenses|
|529 Plans||State-sponsored,Brokerages||Variable (low to moderate)||Moderate||Tax-free growth and withdrawals for education expenses||Qualified education expenses|
|Investment Accounts||Financial Institutions||Variable||High||No||No|
Credit Unions, Brokers
|Variable (low)||Low||No (but lower rates for minor's income)||None(minor gains control at the age of 18 or 21)|
Radiant Credit Union: Your College Savings Partner
While you may not know where your child will go to college, it’s never too soon to start saving money for his or her education. At Radiant Credit Union, we know how hard it is to start setting money aside when you’re simultaneously raising a family. That’s why we offer our members a range of tools to help you save as your family grows so you can give your child the best possible start in life .If you’re ready to start setting money aside for college, Radiant offers:
- Our flexible Even-Up, Money Market, and Special Share savings accounts
- Our Future Endeavors Saving Account encourages your child to plan ahead
- Our secure, predictable Share Certificates
Contact us today to see how Radiant Credit Union can help your family prepare for college or click below to learn more about our smart savings account offerings.