Education should be free and available for everyone. But that’s usually not the case.
Saving money for college is becoming an increasing concern among new parents.
Should you start saving money right away?
Will your child work while in college to avoid student loans?
The pressure revolving around investing in education can easily lead to panic.
When all statistics say raising children is expensive, they don’t mean the cost of diapers hurts your budget.
No, they’re not talking about the cost of summer camps either.
It’s the cost of education that has skyrocketed in the last few years!
Although college education isn’t mandatory, many believe a degree helps with landing a better paying job.
Sadly, chances of that happening are becoming slimmer as time goes by, but that doesn’t mean universities are becoming useless.
If you’re planning to help pay for your child’s education, chances are you need to prepare yourself financially, starting as early as possible.
Saving for college isn’t easy, but there are a few options you can take into consideration.
529 plan – 529 plans are designed specifically to help pay for your child’s college. You basically top it off periodically with after-tax money and withdraw when you need to start paying college expenses.
They come in 2 forms: prepaid 529 plans (learn more about prepaid tuition plans) and 529 savings plans.
Both have their advantages and disadvantages. For instance, you have certain tax benefits when setting up a 529 plan. But you could face tax penalties and fees if your child doesn’t go to college.
There are many aspects that regulate how 529’s function. Make sure you do your research and see whether they’re a good fit or not for your child’s future.
Coverdell savings plan – Coverdell Education Savings Accounts are similar to 529 plans, with some exceptions.
A Coverdell account also offers plenty of tax benefits, which is a good thing. On the downside, you’re limited to contributing only $2,000 a year.
Again, take both advantages and disadvantages into consideration before deciding whether or not to opt for a Coverdell ESA.
UGMA/UTMA accounts – UGMA and UTMA Custodial Accounts also offer certain tax benefits and could be a good alternative to start saving for your child’s education.
Of course, these types of accounts are also characterized by certain pros and cons.
One big advantage is, should your child decide not to attend college, you won’t face any tax penalties, since you’re not obligated to pay for college expenses.
Many see this as a disadvantage because, well… your kid could either pay for college or for an expensive trip around Europe in the new car they just bought with cash! The money becomes legally theirs, when they become adults.
While you may probably reason with the young adult you raised, the true disadvantage here is not having your money tax sheltered. Also, such an account might hurt your kid’s chances of applying for financial aid, unlike the previously mentioned plans that don’t influence the financial aid aspect by much.
Although these 3 options seem to be the most popular, other alternatives to save for college exist.
You can make use of your Roth IRA to save for your child’s education.
There are credit cards that offer college savings rewards. Who would have thought?
Traditional savings plan
If none of the above sound appealing enough for new parents, saving money for your child’s education, the translation way, isn’t uncommon!
You could easily open up an old fashioned savings account and take it from there.
Saving as much as you can each week or month can really go a long way after few years!
Many families have a tight budget as is, but with a bit of effort, surely parents can set something aside to save for their kid’s college fund.
As little as $20 a week translates into a little over $1,000 in a year! In 10 years, you’ll have $10,000 set aside.
By the time your child will be ready to attend college, you could have a big chunk of their tuition saved up!
Does a traditional savings plan sound like a joke to you?
You could be on to something, seeing how the average return rate is way below 1%!
However, by starting to invest early on, you could benefit from the magical and wonderful effect of compound interest.
At first it may sound complicated, but once you understand the basics of investing, you can start small and begin earning a nice return of investment real soon.
You could invest in short term bonds or certificates of deposit and keep reinvesting your profits until you build a nice nest egg that could pay for your child’s education.
Student loans are best to be avoided, seeing how it’s becoming more and more difficult to get rid of them.
But what happens if you’re unable to help, yet you’d like to see your child graduate?
A good way to handle the situation would be to motivate your child to work while studying.
Making money in college comes with pros and cons, but the bottom line is, having a job, even part time, teaches a young adult about financial responsibility and gives them an opportunity to peak into ‘the real world’.
Scholarships are also a great help.
In order to qualify though, students should have excellent results in school, and that’s not easy to achieve for everyone.
However, if you’re able to motivate your kids enough, they could work their way up to a chance to get a scholarship.
Be careful though, stressing them too much to study hard could have the opposite effect.
If still nothing works and you can’t help them financially in any way, make sure you at least guide them through the downsides of having student debt.
Student loans could help young adults obtain the degree they dreamed of, but paying student debt is generally a pain in the ass.
What are the ways you plan to save for your kids’ college fund?
Have you already thought about it or do you think there’s still plenty of time to start saving?
Latest posts by Adriana (see all)
- Hidden Expenses Homeowners Often Forget - March 9, 2020
- Expenses that Your Tax Accountant Can or Can’t Help you Deduct - August 22, 2019
- Personal Finance and Mental Health: When to See a Therapist - August 9, 2019
- Strategies to pay off student loan debt faster - August 22, 2018
- 5 profitable house flipping strategies - January 31, 2018