Saving for College
The cost of college tuition increases every year, making saving for college a challenge for parents everywhere. According to the National Center for Education Statistics, the annual cost of undergraduate university can range from $15,000 -- $40,000. No matter how old your children are, if you want to help them attend post-secondary education, you should start saving for their college education.
Here are four tips for parents who are preparing for college expenses.
Use a 529 Plan.
A 529 plan is a tax-advantaged college savings plan. Earnings in 529 accounts are not subject to federal or state taxes when used for educational expenses. Any unused money can be transferred to other family members if your child chooses not to attend college after all. There are two types of 529 plans: savings plans and prepaid plans.
- Savings plans are similar to 401(k) or individual retirement accounts (IRA)—you contribute money and it is invested in the stock market. The amount available to pay for college is dependent on the amount contributed and how much interest it earns over time.
- Prepaid plans allow you to prepay the cost of public, in-state institutions. The funds can also be used at private or out-of-state universities.
Set Up a Trust Fund.
Trust funds are another popular way of saving for college. The most common trust for a minor is a Uniform Gift to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account. The UGMA and UTMA programs are custodial accounts that can be used for college savings and given to a child when they reach 18 or 21, depending on the state.
Consider a Roth IRA.
Roth Individual Retirement Accounts - or IRAs - are most frequently used for retirement savings. But they can be used to fund college expenses, as well. Roth IRAs, are exempt from withdrawal penalties if the funds are used specifically for qualified educational expenses, including tuition, fees, books, and room and board.
Save on Textbooks.
Not every strategy for saving money will start before your children are enrolled in college. If they are already enrolled, textbooks are one of the biggest expenses they'll face and can cost hundreds or even thousands of dollars per semester. The good news is that there are ways to save on textbooks. Before your child buys books for the semester, sit down with them and help them determine if the book is actually necessary. If so, have them use discount booksellers online or used bookstores on campus. There are also services that allow students to rent textbooks, which can lead to considerable savings over the course of their college career.
The cost of college is expensive and only continues to rise. It's critical to start saving early and take advantage of all the available investment options to set your children up for success when the time comes to send them off to university.
Tools to Help
Cash Flow Budget WorksheetDownload