If your child is still in their diapers, it may seem far too early to start thinking about college. But the sad truth is, it’s not. College tuition rates are skyrocketing, and they’re only expected to keep growing. As a result, experts argue that parents should start saving as early as possible, even if their child hasn’t yet learned how to walk.
Understandably, this is a hard pill to swallow for most parents. They don’t know if their child will go to college, plus they may be trying to pay off their own student loans. But saving earlier rather than later can prevent you and your child from ending up in a mountain of debt 21 years later.
Thankfully, there are many ways you can get started saving for college, even if your budget is tight.
How much should you save?
You should save as much as possible without wreaking havoc on your current financial status.
Even state schools can cost up to $10,000 per year in tuition, so you’ll need plenty of money in the bank to help fund your child’s education. However, you also have your current obligations to think about. Your current debts and financial obligations should come first, as well as any emergency and retirement funds.
Once you have these settled, see how much per month you can put towards your child’s education fund without forcing you to live paycheck-to-paycheck. Remember, if you start early enough, you can always put more in later as your income grows.
How to save for college
While you could set money aside in a regular savings account, there are also college-specific accounts that you can take advantage of.
529 College Savings Plan
A 529 College Savings Plan is one of the most common investment savings plans for parents. These plans are similar to IRA or 401K plans in that they’re tied to the stock market. You’ll have several investment options to choose from, all with varying levels of risk and potential. Any gains you receive can be tax-deferred, and if the funds end up being used for educational purposes, you won’t have to pay any taxes on them at all. You can also use these accounts to pay for K-12 tuition.
However, since they’re tied to the stock market, 529s will fluctuate. Additionally, if the money is not used for educational purposes, the earnings will be subject to taxes and a 10% penalty.
Prepaid Tuition Plans
Prepaid tuition plans work in the same way as 529s, but they’re not offered in all states and may be restricted to only in-state schools. Here in Texas, we have a prepaid tuition plan known as the Texas Guaranteed Tuition Plan. It can be put towards college tuition at Texas public two-year and four-year schools, as well as in-state private colleges and universities. Some out-of-state colleges and universities may also be eligible, though not all.
Coverdell Education Savings Account
Coverdell Education Savings Accounts, or ESAs, are brokerage accounts that allow you to invest college savings in any stocks, bonds, or funds. Similar to 529s and prepaid tuition plans, they can be withdrawn tax-free assuming the funds are used for educational purposes. However, ESAs have the added bonus that they can be used for a wide variety of K-12 educational expenses, not just tuition.
The potential downside with ESAs is that you can only contribute $2,000 per year per beneficiary. 529s and prepaid plans, meanwhile, have a much higher account balance restriction.
While IRAs are typically used for retirement, many families often use them for college savings. This is because Roth IRAs can be withdrawn prior to age 59 ½ for any purpose you choose. Plus, since you already paid taxes on it, you won’t have to pay taxes again or be penalized for taking it out early.
Saving for your child’s education is one of the best things you can do to help guarantee a good future. At Steadfast Academy, we want to ensure all our kids reach their full potential. To learn more about our program, contact us today!