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.
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.
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.
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:
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.
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.
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.
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.
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.
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:
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.
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.
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.
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!
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 |
Coverdell ESAs | Banks, Credit unions, brokerages |
Variable (low to moderate) | Low to moderate | Tax-free growth and withdrawals expenses | Qualified education expenses |
Share Certificates | Banks, Credit unions |
Fixed (low to moderate) | Low | No | No |
Savings Accounts | Banks, Credit unions |
Variable (low) | Low | No | No |
Traditional IRAs | Banks, Credit unions, Financial institutions |
Variable (moderate) | Moderate | Tax-deferred growth; tax deduction for contributions | Qualified education expenses |
Roth IRAs | Banks, 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 |
Custodial Accounts | Banks, 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) |
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:
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.
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