Effective Ways to Save for Your Child’s College Education
No matter if you’ve just brought home your newborn baby, or you’ve recently learned you’re expecting, it’s never too early to start saving for your child’s college education or at least think about saving for college. While the cost of higher education seems to be rising by the minute, there’s still plenty you can do to help keep you future college graduate out of debt without ruining your current budget or finances.
529 College-Savings Accounts
If you’re looking for sheer convenience and ease of use when it comes to saving for college, look no further than 529 accounts. These accounts let you invest your after-tax funds and withdraw them as well as their gains without getting hit with a tax penalty when you use them for college-related expenses. Operating costs, investment options and fees vary by state, so be sure to do some research before investing.
One thing to note with 529 savings accounts is that you might have to pay tax penalties and fees if your child decides not to go to college and you withdraw the funds anyway. That being said, you can change the name of the beneficiary on the account.
Prepaid Plans
Much like you do business with your local insurance agency to offset high future costs of auto repair, medical services and home repairs, you can do the same with a prepaid college savings plan. These plans are ideal for those concerned about the possibility of tuition being higher when their child is ready to attend college. The way state prepaid plans work is parents pay according to either the average cost of in-state public colleges or by semester. There are stipulations for state prepaid plans, such as the promise (or lack thereof) for the state to cover the unit or semester, and whether the state legislature agrees to cover the balance of tuition left unpaid by the plan’s total funds. Be aware that there have been instances of underfunded prepaid plans triggered by financial downturns.
Coverdell Education Savings Account
The Coverdell Education Savings Account works a lot like a 529 account in that it shares the same tax advantage and remains the parent’s asset. The benefit of this type of ownership is that it won’t impact your child’s chances of qualifying for financial aid, but the same can’t be said if you opt for a college savings plan in which the assets are classified as your son’s or daughter’s.
One of the biggest differences with a Coverdell account, when compared to a 529, is that Coverdell account funds can be used for education expenses incurred before college, such as private school tuition for grades K-12. It’s also worth noting that there are limits on how much you can contribute to such an account, and you might not be eligible if you and your spouse earn more than $190,000 a year. Finally, there could be a tax penalty if your child doesn’t use the money in the account by the time she or he turns 30.
Know that these are just a few ways to save for your child’s future college education. Do some research on your own, and consider combining strategies to maximize your savings. While you might not receive a degree in college savings strategies, you can certainly be a star pupil.
