Aug 29, 2018
What’s The Best Way to Save for College? A Guide for Parents
By Stash Team
Avoid the student loan debt trap.
College graduates earn 56% more than people with only a high school diploma, and that gap has expanded over the years.
Not only can a college education set you or your children up for increased earnings in the future, but college can also introduce young adults to new ideas, people, and cultures.
However, with the cost of college increasing rapidly, saving for college now is harder than ever.
After adjusting for inflation, students are paying 213% more for tuition today than they were in the late 1980s, according to research. That means more students are likely taking on more debt that can negatively affect their lives long after graduating.
How do you start saving today to help make sure college is affordable for your kids? Starting a college fund early can make enjoying the college experience much easier for your children.
Open a custodial account
A custodial account is a relatively easy and popular method to save for college. A parent can open one at a bank or financial institution, and save or invest for their kids.
The big advantage of a custodial account is the flexibility. The money saved in a custodial account does not have to be used strictly for education and can be withdrawn at any time, as long as the money is used to benefit the minor. Or, once the child reaches the age of majority.
So, you can potentially use a custodial account to save for college, as a graduation present, or even as an account to help your child buy his or her first car.
Keep in mind, however, that while there are no limits to how much you can contribute every year, there are tax considerations. For 2018 any contribution over $15,000 would be subject to a gift tax. If you’re cutting it close to the contribution tax limit, you have the option to transfer funds to a 529 plan.
Start a 529 savings plan
When people refer to a “college savings account,” they often mean a 529 plan. These accounts are supported by the government and have unique tax advantages to help parents save for their kids’ college education.
When money is deposited into a 529 plan, it can be invested in mutual funds, exchange-traded funds (ETFs), and other vehicles. The contributions will earn interest tax-free.
Contributions to a 529 plan must be used for education expenses like books, tuition, computers, board, and other education-related expenses, however. If the beneficiary decides they don’t want to go to college, then the money can still be withdrawn, but the capital gains will then be subject to tax.
Rules and regulations can vary from state to state, too.
Use a general investment account for flexibility
Many people want the spending flexibility of a custodial account with the greater range of investment options that a 529 plan provides. A general investment account—or brokerage account—as a college savings tool could serve as a possible solution.
A brokerage account isn’t subject to many of the same regulations placed on other types of savings accounts. However, there are no tax benefits.
Parents can invest their money and use the funds for any purpose, but the capital gains will be subject to taxes. Also, any money given as a gift that exceeds the annual exclusion would be subject to a gift tax.
Lock in the price and prepay
Tuition prices are likely to increase.
Some colleges and universities offer prepaid tuition plans in which parents can make regular, tax-advantaged contributions. In addition, the price of tuition is locked in once the plan is opened.
Some plans allow for more flexibility and choices than others. While these plans may limit student’s choices somewhat, they also limit costs in the future.
Now or later: education savings accounts
Another way to save is through Coverdell Education Savings Accounts, which have tax benefits for parents saving for their kids’ college education. Unlike accounts meant for college, you can use these accounts for any level of education—from kindergarten to college.
Contribution limits are low ($2,000 per year) for these accounts, however, and there are no state tax benefits.
Save early, save often
Small, regular contributions over time are much more manageable than trying frantically to save thousands of dollars in your child’s teenage years. That’s why it’s a good idea to start saving early and to save often.
Stash makes it easy to save for your child’s education. You can begin saving with as little as $5. Over time, those small contributions can make a big difference.
Invest in their futures
Open a custodial account for the kids in your lifeStart now
Congrats, Grad! Here are Six Financial Goals Now That You Have That Degree
What Is an ETF? Definition and Guide
Supporting AAPI-Owned businesses
Money Lessons I Learned From Mom
8 Tips to Spring Clean Your Finances
What Is a Roth IRA and How Does it Work? The Complete Guide