Best Way to Save for College

Here’s a real-life scenario: If your child who was born in 2018 and began kindergarten in the fall of 2023, they’ll be in college from 2036 to 2040. Let’s say they choose to attend an average private 4-year college.

The aggregate 4-year cost of your child's college education will total more than $500,000 or somewhere around $125,000 per year. Remember, too, that the average annual price increase of over 5% per year will likely continue into the future.

Next to buying a house, college could be the largest financial investment you will make — depending on how much you plan to commit to your child’s education. Saving for tuition, books, room, board and fees depends heavily on your needs and timeline.

Best Ways to Save for College at a Glance

• Create financial targets: Depending on how old your children are and the years you have to save, begin making plans as to how much you'll need by the time they're all college-aged.
• Consider all your options: Education plans include 529 Plans, ESAs and more options.
• Automate your savings: No matter what goal you're working towards, automating your savings with an efficient budgeting app will help you reach your financial goals.

Overview: Saving for College

How to save and how much to save for college depends primarily on when you need to start paying tuition. If you’re the parent of multiple young children close in age, fast forward 18 years, and several kiddos could be in college at the same time.

What to Consider Before You Start Saving

Parents of young children, you have time on your side. Depending on your family’s financial situation and number of children, it may be helpful to set a financial target tied to a specific outcome.

For example, you may decide to pay in-state tuition for each child, whatever that may be at the time, and choose to save a set dollar amount.

College choice is the #1 determinant of how expensive your child’s college experience will be. The cheapest options are usually community colleges or a school that will give your child a major scholarship.

Another thing to consider is your child’s intended degree and career path. A private school education, including Ivy League, may result in increased earning power along with its increased price tag. That depends on your field of study as well.

If you plan to gain an accounting degree to become a CPA at a medium-sized tax firm, it does not matter whether you attended Harvard or your local state university. If you aspire to work for a prestigious business consulting firm that hires mostly Ivy League grads, you should go to an Ivy League school.

Regardless of where or what you study, your chosen career path should have enough earning power to make your college investment worthwhile.

Paying $100,000 per year at a private university for an undergraduate degree in sociology and making $45,000 a year may not be a worthwhile investment. This is especially true if you could have gotten the same education at a public in-state school for $40,000.

The U.S. Department of Education compares school tuition with the average salaries of their alumni.

Tuition, room and board and other school-related fees are just one component of college expenses. Living expenses and books are another chunk. Thus, being frugal can save tens of thousands of dollars.

Paying to live in a residence hall and buying a meal plan can add an additional $12,000 or more.

Living in a cheap off-campus apartment with roommates and cooking your own food or living at home and commuting can cut those costs dramatically. Sticking to a budget and engaging in cost-saving measures like buying used books can help lower overall outlay.

Best Ways to Save for College

Once you’ve determined overall financial targets that fit your family’s educational needs, it’s time to decide which financial tool works best for you. Here are a few options:

529 Plans

529 plans, also known as qualified tuition plans, are state-sponsored college investment accounts that invest funds based on the current age of the child beneficiary and the anticipated year they will attend college.

You can decide between two different types of 529 plans: prepaid tuition plans and education savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

Prepaid Tuition Plans

Prepaid tuition plans allow you to purchase future credits and tuition at a participating institution at today’s prices. You usually cannot pay for future room and board. You’ll have to make sure you fulfill the residency requirement as well.

Educational Savings Plans (ESAs)

You can choose a static 529 plan or a lifecycle college fund (also called target-date funds), which means they’re more aggressive when the child is younger and grow more conservative as they turn 18 and you must withdraw the fund.

These student accounts provide federal and state tax deductions for your contributions, which help you lower your overall taxable income amount. Friends and family can also make contributions.

Among the biggest tax benefits is that your contributions grow tax-free and are not taxed when you withdraw them. Each state’s rules, fees and investment portfolio is a little different, but you don’t have to choose your own state’s plan if you don’t like it, so feel free to select another state’s plan that best fits your needs.

These funds can only be used for educational purposes. 529 plans have recently expanded to include tuition at elementary or secondary schools for up to $10,000 in annual withdrawals from a 529 plan. Funds can be withdrawn only for qualified educational expenses and if not, will incur a 10% penalty and be subject to taxes.

You also can move 529 funds between siblings by changing beneficiaries on the accounts or transferring the funds. Since 529 plans are lifecycle plans based on a long-term investment strategy, these could be a good choice for families who have started saving for young children who have a decade or more to go until they start college.

UGMA/UTMA Custodial Accounts

The Uniform Gift to Minors Act (UGMA) and Transfer to Minors Act (UTMA) allow anyone to open an investment account for a minor child. An adult can act as a custodian. The funds transfer to the child when they become of age to take over the account, between 18 and 25, depending on the state’s laws. In the meantime, the custodian may withdraw funds from the account for the child’s use.

Funds do not have to be used for educational purposes, so these accounts are a way to pay for living expenses, a car and other future needs for the child.

You have more control over which investment vehicles you select and there is no limit to your contributions. You cannot change beneficiaries of a UTMA account and the money does not grow tax-free, though it is taxed at a lower rate for estates and trusts.

These are also a good choice for families who are not sure if their children will attend college and want to have a backup plan for another purpose.

Certificates of Deposit

Depositing a chunk of cash in a certificate of deposit (CD) is a safe way to store future college tuition cash for the short term and earn a little interest on it.

The college funds are FDIC insured and provide a guaranteed rate of return over a fixed term, 60 days to up to 2 years. CDs have a minimum deposit of $500 to $25,000, depending on the bank, rate and term. These are great short-term vehicles that steadily earn money while you wait to use them.

Investment Accounts

There’s no law that states that you have to stick with a 529 plan or another type of education-oriented account. You can invest in stocks, bonds, mutual funds and more. Get an idea of how you want to invest and consider your risk tolerance.

From online brokerages to traditional financial advisors, investment accounts provide an alternative way to fund education.

Upromise offers cash back on everyday purchases at restaurants, online or using the Upromise branded credit card, which gets deposited into a linked 529 college savings account. A great budgeting app can also help you to save for college by helping you keep an eye on your finances and allocate money to be saved each month.

Automate Your Savings

Whatever type of account you end up selecting, automating any saving you plan to do is the key to success. When you put money into your children’s college fund, you make saving and planning for the future a priority.

There are several ways to set up an automatic transfer, depending on your needs. You can set up a monthly payment to the 529 plan or investment account of your choice and have each child’s monthly contribution come out of your account like a regular monthly bill. Some people use debit cards or credit cards that round up each purchase.

You can also set up monthly automatic transfers to your savings account and roll that money into a CD when you reach a deposit threshold.

One of the best ways to set up automated saving tools is to have money diverted out of your paycheck into the college plan of your choice. That way, you don’t see the money go into your account and won’t accidentally spend it.

UNest is designed specifically to help busy parents find the right college savings plan for their kids and to create a custom savings plan. When you visit UNest, you can choose between Regular and Family Plans. A regular plan is designed for just one child, but a Family plan can support college savings for up to 5 kids.

UNest creates sharable accounts that are tax advantaged, ensuring you enjoy all the benefits of a UTMA. When you share the account with friends and family, they can donate at any time. Everything works through a streamlined mobile app, and you even get to choose the investment options for your account.

You take a bit more control of college savings, and the account is easy to turn over to your kids in the future. The app helps you make investment decisions based on your child’s goals, their age and how much schooling you believe they will need.

Low fees make these accounts accessible to anyone, and UNest deposits rewards in your account when you shop with partners like Old Navy, DoorDash, Nike, Intuit and Earnest.

Try EarlyBird

What is EarlyBird? EarlyBird is a Registered Investment Advisor (RIA) that offers investment opportunities for families with young children. When you add money to an account, EarlyBird allows anyone to invest in a child they love.

With five account options, you can invest in:

• Conservative investments, 100% bond-based ETFs
• Aggressive investments, 100% equity-based ETFs
• And 3 account types in between

You pay nothing for the first $200 you deposit. After that, you only pay $1 per month for your subscription. Additionally, all gifts from family members or friends carry a low $2 gift processing fee. You can start saving today, share the account with anyone who might want to give and save for the future.

An added bonus of EarlyBird is the Memories section where you can leave videos and photos for your child when they turn 18 and access the cash in the account.

In addition to this unique investment opportunity, Benzinga readers get their first $15 free when they establish a new account with EarlyBird. Every little bit counts, as evidenced by EarlyBird’s willingness to give you a head start on your savings.

Check out Benzinga’s other guides on managing money in college withhow to save money during college orways to make money during college.

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