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How to Save for College

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While most parents expect their children to go to college, fewer than half of all families have started an education fund. With the average cost of public college on the rise, it’s more important than ever to start saving early. The sooner you start, the easier saving will be, and there are a variety of options to choose from. Here’s an overview of some popular college savings resources.

Personal Savings Program

It may not be possible to amass thousands of dollars at once, but a simple way to start saving for your child’s education is to set aside a few dollars each week. If your budget is already tight, you may be able to reduce your variable expenses, like one fewer dinner out each week, and put the savings aside. Another idea is to ask relatives to help out. Instead of them buying your child large gifts for the holidays, you could ask them to get a smaller, token gift and to donate the difference to your child’s college fund.

Savings Bonds

For generations, U.S. savings bonds have been the savings vehicle of choice for a child’s future. Savings bonds are backed by the full faith and credit of the U.S. government and, depending on the type of savings bond, may have fixed interest rates. Plus, the interest your savings bonds earn are not subject to state or local income tax.  Additionally, redemption of certain savings bonds for qualified higher education expenses may be eligible for tax exclusion.

Coverdell ESAs

A Coverdell Education Savings Account is an account you can use to pay for your child’s future education expenses such as tuition and books. Though it’s not specific to college (Coverdell ESAs can also be used for elementary and secondary school), it’s another way to set money aside that could grow tax-free until withdrawn.

Roth IRAs

If you’ve started saving for retirement with a Roth IRA, you already have access to money for your child’s education. A Roth IRA is a type of IRA that allows your after-tax dollars to grow tax-free.  If you take a deduction from your Roth IRA before the age of 59 ½ you may have to pay additional tax.  However, there are certain exceptions where you may not have to pay the additional tax, including for distributions that are not more than qualified education expenses.

529 Plans

There are two kinds of 529 plans: a college savings investment plan and a prepaid tuition plan. Prepaid tuition plans are often sponsored by the state government and are therefore based on the cost of an in-state public college education. The amount is locked, and you can pay all or part of the cost without worrying about the price rising each year. A college savings plan, however, is similar to a 401(k) or IRA—your contributions are spread over the investment options you choose (such as stocks or bonds) and are subject to the fluctuations in the financial market.

If you’d like to explore your college saving options further, speak to a financial adviser to pinpoint your specific needs. Anyone under 18 should talk to their parents first about saving for college.

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