It's never too early to start planning for your child's college education, even if they're currently a toddler. Setting aside money earlier, rather than later, will help reduce the amount in loans you and your child will have to take out to help pay for tuition.
There are multiple ways to go about saving for tuition, and luckily, you can utilize them all to ensure everything from tuition to housing costs are covered.
529 college plans
Operating in a similar manner to 401(k) retirement accounts, 529 college plans allow parents to save for college through various investment options. Furthermore, these plans offer tax advantages and aren't subject to federal taxes, according to U.S. News & World Report.
The money in these accounts can be used for either undergraduate or graduate studies and at any accredited two- or four-year institution.
To get started, you might consider aggressive investment strategies while your child is still young, explained Bankrate. Then, as he or she approaches college, switch the account to more stable investment options.
A 529 college plan is somewhat restrictive, but can also be seen as offering protection. For example, the money can only be used on college-related expenses, such as tuition, housing and books. Nonqualified expenses are subject to income tax and a 10 percent penalty on earnings.
Furthermore, a 529 plan can change beneficiaries if the child it was set up for doesn't need the money. Parents can't take that money and use it for other expenses. Instead, the funds must be used to pay for another child's education.
Parents can also purchase prepaid 529 college plans. Instead of investing for the future, you're essentially buying tuition credits from an in-state school at current tuition rates. Even if tuition increases by the time your child's freshman year rolls around, they'll still get the full year of education at the original price.
However, a downside of a prepaid 529 plan revolves around choice. Since parents are buying credits from a specific college, the child has to attend that school, which severely limits choice.
"Utilize many savings methods when setting aside money for your child's college tuition."
Savings and certificates of deposit
It's best to utilize many savings methods when setting aside money for your child's college tuition. A savings account with a high interest rate can be dedicated to school expenses other than tuition, such as fees, books, housing and extra spending money.
Certificates of deposit are another excellent way to save money. According to Nerdwallet, CDs are usually offered with various terms, such as five years. Withdrawing money early results in penalties, but in exchange, CDs come with higher yield rates.
To save for college, CD laddering is a process worth considering. Essentially, you invest a determined amount of money in various CD accounts with varying terms, from one to five years. As the one-year CD matures, take that money and put it in a new five-year CD and repeat this process. The idea is to have an account mature every year and create bigger savings for tuition.
Make wise decisions
Not every family can save large sums for their child to attend a prestigious university, whether in-state or out-of-state. Luckily, parents can still set aside money for education and talk with their kids about attending a more affordable school, or knocking out two years at a community college before transferring.
Parents should start saving money for their child's college education to help prevent them from falling into large amounts of debt later in life. Your children will end up thanking you.
For more information about smart ways to manage your finances, contact Landmark Bank.
Back to Blog