Getting a college education is getting more expensive every year, which makes the thought of paying for your kids to attend college daunting. For many people, having a college degree is the first step towards getting the job they want and building a strong financial future.
Many parents start saving for their children’s education as soon as they are born or when their children are still young. This allows you to save a little money at a time and take advantage of mechanisms like compound interest to maximize your savings.
But it can be difficult to know where to start when it comes to saving for college. There are so many types of savings accounts, so which one is the best? Fortunately, some options are specifically designed for education savings and can help you and your children reach your goals.
To start
The first step in setting up 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 the 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 approaches, you can begin to pay 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
Education savings accounts work similarly to Roth IRAs, a common investment and savings option for retirement. With an ESA, you are 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 a smart approach, you can grow your money – tax-free – throughout your child’s lifetime until they’re ready for college.
529 packages
ESAs are a great option but also come with income restrictions. Another solid option if you don’t meet these restrictions is a 529 plan, a type of investment account that comes with tax benefits when used to pay for education costs. There are no annual limits on contributions to 529 plans, but each state has an aggregate contribution limit that is influenced by the cost of college education in that state.
Transfer or gift of uniform to minors
Another type of savings account for your children is a securities account, or a UTMA or UGMA account. This is a type of trust that allows minors to hold securities without the assistance of an attorney. Keep in mind that once nominees reach a certain age, they can use the funds in this type of account for anything. This means your child could use the money for something other than college, which some parents would prefer to avoid.
Financial aid
Although not a savings account, financial aid is an important part of paying for college. There are thousands of scholarships available, and your child can apply for assistance through the free Federal Student Aid application, which may 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 in different ways. Make sure you fully understand the implications of any savings account before choosing one.
There’s no doubt that college is an expensive proposition these days, but it doesn’t have to be out of reach for you or your kids. With a little planning and disciplined savings, you can set your kids up for success for years to come.
Finance FYI is presented by 1st Security Bank.
AT Washington’s 1st Security Bank, we take a personalized and personal approach to your financial well-being. We live in the communities we serve, so our branches offer tailored solutions to their communities. We believe relationships make the difference, which sets 1st Security Bank apart.
