How to Start a College Fund for Your Child
Having a child is both joyous and expensive. From diapers and daycare to food and clothing, it’s hard to think about saving money for college when your life just got a whole lot more expensive. A college education will likely be the most expensive investment of them all, so it’s essential to establish a college fund for your kids as early on into their life as possible and continue to commit money to it throughout their childhood. If you are like many people however, as life happens, so do other financial priorities such as paying off a mortgage, a credit card bill, or maybe even chipping away at your own student loan debt. In fact, according to student loan service Sallie Mae, only 52% of parents are actively setting money aside for college tuition and, on average, save around $13,000 – an amount that barely covers the cost of tuition, fees, and room and board for in-state colleges.
It’s never too late to start a college investment fund, while also looking into potential scholarship and grants opportunities. there are several ways to kickstart a college fund for your child while still maintaining your own money goals. At Commonwealth Credit Union in Kentucky we recommend paying off as much debt as possible before starting a college fund, setting up an emergency savings fund to cover any unexpected costs, and continuing to put a percentage of your income towards a retirement plan, like a Roth IRA or a 401(k).
Open a Savings Account
The most common way to start saving money is to open a simple savings account. At Commonwealth Credit Union we have saving options to keep your money safe and wait for your future plans. Savings accounts also allow you to earn interest on top of any amount that you deposit.
The most common way to start saving money is to open a simple savings account. At Commonwealth Credit Union we have saving options to keep your money safe and wait for your future plans. Savings accounts also allow you to earn interest on top of any amount that you deposit.
However, only using a savings account for college funds may not be the best way to save what you need for your child’s college education. Most savings accounts offer lower interest rates than other savings options, so it’s important to first calculate what you need so you can determine what makes the most sense. Additionally, if you are considering a savings account for your child’s college fund, be sure to keep the account in your own name instead of your child’s name. Financial aid is determined based on income and assets, so students with a savings account in their name could potentially end up earning less aid. The bottom line? If you are trying to save money for college fast and reach your college savings goal, then a traditional savings account may not be the best way to go.
Explore College Savings Plans
While it is common for parents to set aside money into a regular savings account, there are many advantages to exploring these college savings options:
While it is common for parents to set aside money into a regular savings account, there are many advantages to exploring these college savings options:
Education Savings IRA Account (ESA)
An Education Savings Account (ESA) allows parents to save up to $2,000 after taxes per year, per child and grows tax-free. If you decide to start right when your child is born, you can save more than $36,000 by the time your child is 18. You will most likely earn a higher rate of return using an ESA than a regular savings account, plus you won’t have to pay taxes when the money is withdrawn.
While an ESA makes sense for many families trying to save for college, it’s important to understand that the beneficiary must use the amount saved by the age of 30, and parents must be within the certain income limit in order to qualify (contributing phases out for incomes between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for those married filing jointly). It’s also helpful to know that an ESA can be used for primary and secondary school, not just college expenses.
529 Plan
A 529 plan is a great way to save for your child’s college education, especially if you don’t meet the income limits for other plans such as an Education Savings Account (ESA). The right 529 plan will give the option to migrate the beneficiary to another member of the family. For example, if your firstborn decides to take a different path other than college or even gets a scholarship, their 529 plan can be transferred to a younger sibling.
A 529 plan is a great way to save for your child’s college education, especially if you don’t meet the income limits for other plans such as an Education Savings Account (ESA). The right 529 plan will give the option to migrate the beneficiary to another member of the family. For example, if your firstborn decides to take a different path other than college or even gets a scholarship, their 529 plan can be transferred to a younger sibling.
For most parents, a 529 savings plan is a great college savings options because of the higher contribution rates in comparison with other programs. While rates vary state to state, parents can contribute up to $300,000 (tax-free) to their child’s college fund. In the state of Kentucky, parents can contribute up to $2,000. In contrast with an ESA, a 529 plan does include restrictions based on age or income.
Uniform Transfer/Gift to Minors Act (UTMA or UGMA)
UTMA/UGMA plans are designed for purchases beyond education savings. When using a UTMA/UGMA plan, the account is in the child’s name but controlled by a parent or grandparent until the age of 21 (age 18 for UGMA.) Once the child has reached their age limit, the control of the account is transferred to the child to use however they want.
UTMA/UGMA plans are designed for purchases beyond education savings. When using a UTMA/UGMA plan, the account is in the child’s name but controlled by a parent or grandparent until the age of 21 (age 18 for UGMA.) Once the child has reached their age limit, the control of the account is transferred to the child to use however they want.
This type of college plan makes sense for parents looking to create a savings account for their child that can be used for more than just college tuition. However, a beneficiary cannot be changed once selected so it is ultimately their decision on how to spend their money.
Every Bit Counts
Over the last few decades, college tuition has tripled and students are graduating with tens-of-thousands of dollars of debt. At Commonwealth Credit Union, we always recommend starting a college fund as early as possible, even if that means setting aside $50-$100 each paycheck at first. While it may not be realistic for your family to foot the entire college bill for your child, you can help your child start their post-graduate adult life on the right foot, with less debt and financial stress.
Over the last few decades, college tuition has tripled and students are graduating with tens-of-thousands of dollars of debt. At Commonwealth Credit Union, we always recommend starting a college fund as early as possible, even if that means setting aside $50-$100 each paycheck at first. While it may not be realistic for your family to foot the entire college bill for your child, you can help your child start their post-graduate adult life on the right foot, with less debt and financial stress.
It’s also common for family members to want to help with college savings. Grandparents, godparents, and more may want to invest in your child’s college savings, to help them grow and succeed. And once your child starts earning a little bit of spending money themselves from part-time jobs, they can start to contribute to their own college fund – setting aside a little each month and starting the important practice of good spending habits.
A final tip from Commonwealth Credit Union in the college savings game, is to help your child better discover what they might want to study in college. Doing well on AP tests in high school can count towards college credits at some schools, which can ultimately save you thousands.
If you are a soon-to be parent, new parent, or just getting around to saving for your child’s college education, Commonwealth Credit Union is here to help. Talk to a banker about what college savings options might make the most sense for your family.