Getting a college education gets more expensive every year, which makes the thought of paying for your kids to attend a university a daunting one. For many people, having a college degree is the first step toward getting the job they want and building a solid financial future.
Many parents start saving for their children’s educations as soon as they’re born or when their kids are still young. Doing so allows you to sock away a little bit of money at a time and take advantage of mechanisms like compound interest to maximize your savings.
But it can be challenging to know where to start when it comes to saving for college. There are so many kinds of savings accounts out there, so which one is best? Luckily, some options are specifically designed for college savings and can help you and your kids meet your goals.
The first step in creating a college fund is knowing how much you need to save. Having a goal in mind is always a solid starting point when trying to save. Unfortunately, even if you have an idea of which institution your children would like to attend, it can be difficult to predict what tuition will cost in the future. But, you can use a college savings calculator to get an estimate that will get you in the ballpark. Then, as graduation day gets closer, you can start paying more immediate attention to tuition increases and adjust accordingly. Once you have the initial number, you can choose the best savings vehicle.
Education Savings Accounts work similarly to Roth IRAs, a common investment and savings option for retirement. With an ESA, you’re allowed to invest up to $2,000 per year, per child. Of course, investing in the stock market is always a risky proposition. Still, with the help of a trusted financial expert and an intelligent approach, you can grow your money — tax-free — throughout your child’s life until they’re ready for college.
ESAs are an excellent option but also come with income restrictions. Another solid option if you don’t meet those restrictions is a 529 plan, a type of investment account that comes with tax benefits when it’s used to pay for education expenses. There are no annual limits on contributions to 529 plans, but every state has an aggregated contribution limit that is influenced by the cost of college in that state.
Another type of savings account for your children is a custodial account, or an UTMA or UGMA account. This is a type of trust that allows minors to own securities without the assistance of an attorney. Keep in mind that once designees reach a certain age, they can use the funds from this kind of account for anything. That means that your child could use the money for something other than a college education, which some parents would rather avoid.
Although it’s not a savings account, financial aid is an important component of paying for college. There are thousands of scholarships available, plus your child can apply for aid through the Free Application for Federal Student Aid, which can provide access to grants or scholarships based on need. Keep in mind that college savings accounts impact your child’s ability to access financial aid at different levels and ways. Make sure you understand the implications of any savings account before you decide on one.
There’s no question that college is an expensive proposition these days, but it doesn’t have to be out of reach for you or your children. With a little bit of planning and some disciplined saving, you can set your kids up for success for years to come.
Finances FYI is presented by 1st Security Bank.
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