3 easy ways to get started saving today
According to the Institute for College Access and Success, roughly 68% of today’s college graduates have student loan debt. The average graduate in 2017 will head into the working world with around $37,000 in debt to repay for their education. Today’s numbers are staggering, but the thought is even more sobering when you consider a child born today is expected to spend around $250,000 on a four-year degree if college and university pricing continues to trend upward at the same trajectory. Saving for college in your child's early years can help offset that burden and set them up for financial success in the future, but navigating a college savings plan can seem a bit confusing. Not to worry, we have a few tips and suggestions that will get you on the path to saving.
Coverdell Education Savings Account
A Coverdell ESA is an investment account designed to help cover future educational costs of the beneficiary. A parent, guardian, or family member can set up the account and name the child the beneficiary. With a maximum contribution of $2,000 per year, money can be dispersed in stocks, bonds, and mutual funds to grow.
Money can be withdrawn from the account to pay for qualified education needs at eligible institutions. Qualified needs include boarding, books, and tuition. Coverdell ESAs are not limited to college, however. Educational needs in K-12 may also qualify for penalty-free, tax-free withdrawal. For example, if your child will be attending private education for high school, money can be withdrawn to cover tuition fees at that school, as long as the school is a qualified institution.
There is an age limit associated with these accounts. The account must be dispersed for education by the time the beneficiary is 30, or the account must be transferred to a secondary beneficiary under 30 to avoid penalty. Saving for college with this type of account can help offset all or most of a child's education costs.
529 Prepaid Tuition Plans
Prepaid tuition plans are backed by the state, and allow a parent to lock in tuition rates at the current rate, regardless of how tuition increases over time. Locking in a rate can keep education costs from trending upwards for individual families who opt for this type of plan.
When you sign up for the plan, you can prepay the full amount, or pay credit hours over the course of several years, with the objective of paying for enough credit hours to carry a child through four years of education. Saving for college in this manner also keeps the overall cost lower.
The beneficiary and the individual opening the account must be a resident of the state when the account is opened, and only participating schools in the state in which the plan is opened can be attended. For example, if the account is opened in Michigan, any public, state school is included. If a child chooses to go to a school in New York, the conversion process can be complicated and incur penalties. Private College 529 plans can be used at 270 private institutions across the country, and have similar objectives to state-backed prepaid plans.
Traditional 529 Plans
Traditional 529 plans do not lock in tuition rates, but they allow parents and guardians to save for a child’s education. These plans take the money you contribute and invest them across several options. You can choose how your investments are dispersed. Traditional 529 plans are subject to market changes and may go up and down in value. The benefit of these plans is that your child can attend any institution that is considered eligible and utilize the funds in the 529 plan. A plan may also be opened in one state, while the child resides in another, and chooses to go to school in yet another. This allows greater flexibility to the beneficiary once they are of age to make college decisions.
The funds in these plans, however, must be used for qualified educational expenses. They can be used for books, tuition, transportation, and even housing at eligible institutions. They can be allotted at any time during the child’s college education but must be dispersed by the time the beneficiary is 30 years of age.
The idea of your child in college might be hard to imagine right now, but childhood goes by quickly. Saving for college early and planning for your toddler’s education today can help ensure their future financial success as they navigate higher education and adulthood. Giving the gift of education is an invaluable one, and these savings plans will help you do just that.
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