College is one of the most transformative experiences for anybody. Unfortunately, it can also be one of the most expensive.
At the time of writing, there are at least 45 million outstanding student debts. These have amounted to more than $1.7 trillion.
As parents, you want your children to be close to debt-free by the time they graduate. Fail to take steps to secure funding for your child’s college education, and he or she may face debt come graduation.
However, there’s hope. By starting your child’s college fund immediately, you will be securing your child’s education.
Selecting the right account for your child’s education is crucial to funding, but how to start a college fund begins way before that.
It starts as early as you deem it necessary — preferably, as early as your child’s birth!
In this article, we’ll outline the steps for setting up your child’s college fund. We’ll go over the different accounts as well as what you need to do before selecting one.
By the end of this article, you’ll be better equipped to start saving up for your child’s education in the future.
Step #1: Start Saving Indiscriminately and as Early as Possible
Think of your child’s college education as an investment. It may not benefit you personally, but like any investment, it’s one best made early.
Here’s the truth. The best time to make any investment is now.
Time is your best friend on this. How so?
It comes right down to interest. By saving money early, your money, however much it may be, can have time to grow.
Like a fine wine, the longer it (money) is kept, the better.
When it comes to your child’s college education, better means full coverage of his or her educational expenses.
University education isn’t cheap. As we speak, you’re looking at nearly $100 thousand for all the years your child will be hitting the books.
We can only expect costs to rise.
To prepare for this, it would be a great idea to scrimp and save every penny you can as early as now. Besides, you won’t be able to deposit anything into a college education account without any money saved up, right?
In short, save as much as you can as early as you can. Again, your child’s college education is best looked at as an investment.
Step #2: Try to Estimate the Complete Costs of College
Yes, college or university education is expensive. It continues to be so as time passes.
How expensive is expensive? Not having a number in mind can either keep you in the dark or discourage you.
By coming up with an estimate of how much college will cost, you’ll be able to do the following:
- Determine how much you can set aside as college savings
- Determine a time frame
You’re probably thinking: “Why not ask universities?” That’s not a bad idea.
Then again, here’s the catch: universities or colleges can give you information on tuition fees. When has paying for school been only a matter of paying for the tuition fee?
We know that university studies include many other costs outside tuition.
These costs include:
- Board and lodging
- Miscellaneous fees
- Books
- Other living costs
It’s now clear that the tuition fee is just part of the expenses. When you think of an estimate, try to factor in tuition fees along with everything on the list.
Step #3: Choose an Educational Savings Plan
Not all educational savings plans are the same.
Since most educational plans give you returns from investments, most will have tax rules. Some even have limits on how much you can deposit or contribute.
Others, as you’ll see, will let you transfer the savings account to another child. Also, you’ll see that some accounts or plans aren’t fussy about where your child spends the money.
It’s important to choose wisely. With the vast array of options, we have narrowed the best down to three.
Here are some of our top picks for educational savings plans:
A Savings Account
If you’ve done step one, and you’ve got a problem with risk, there’s no need to reinvent the wheel. A regular bank savings account can be the perfect educational savings plan for you.
Bank savings accounts carry a laundry list of selling points. For starters (again, if you’ve done step one), they’re easy to open.
All you need is a valid ID, and probably a small deposit. However, many banks across the country don’t even require one!
Because banks are regulated by federal laws, your money won’t go down the drain due to faulty investment decisions. Bank savings accounts are insured even if the bank you chose closes shop.
By law, banks need to insure as much as $250,000. So, you don’t have to fear losing all your hard-earned cash for whatever reason.
Savings accounts are not just easy to open and set up. Banks also allow you to set up additional features like auto-debits and auto transfers.
With auto transfers, you can arrange for a set amount to be deposited into your child’s educational savings account. This works best if you opened an account with the same bank you already have accounts with.
The benefits abound, but there are some drawbacks.
For one thing, a savings account is not investment-based. You cannot expect much growth in the money you have saved.
At most, banks will allow your money to earn interest. Interest rates usually go at about 2% per year.
If you’re in a pinch for big money for your child’s education, you’ll have to give it time. Also, savings accounts are not specific to any purpose.
This means that your child can blow all of the money on anything once you transfer the account to them.
A 529 Plan
Every investor or financial specialist worth using will sing praises about 529 plans — for good reason.
An educational 529 plan offers a tax-free way for you to save for your child’s college education. Unlike a bank savings account, a 529 plan grows from investments.
Investments that bring money towards your 529 plan come in different forms. These investments can be in mutual funds or federal cash reserves.
Sure, investment is involved, but financial services like the ones we offer can suit your tolerance for risks.
A 529 plan puts more money towards your child’s college savings from investments.
Here’s the good part: you know how every investment gets taxed by the government? In particular, the IRS taxes capital gains.
Capital gains are the money you make on top of the original investment you put in. A percentage of these gains are taxed.
Unlike regular investments, the money your 529 plan generates from investment goes straight to your child’s college savings plan. The gains from the investment are tax-free.
So, 529 plans are a go-to solution for parents who don’t know how to start a college fund or invest. There are just a few downsides, though.
- You as a parent will still have to pay some tax for the money you’ll deposit into the plan.
- If the 529 plan is already in the name of one child, you’ll have a tough time transferring it.
All in all, a 529 plan can be a pretty tax-efficient way to save for your child’s college education.
Mutual Funds
Are you a risky investor with a child to send to college? If so, you can go for high-return albeit moderately risky mutual funds.
Whenever you deposit money into mutual funds, the money stays in a pool of other deposits. The money in the pool is used by your bank or financial institution to make high-return investments.
The minimum amount you can put in can vary from one bank to another. The best thing to do is ask, compare, and see which one you can afford to invest in.
Mutual funds can lead to massive returns on your investment. It may even be too much for college.
Sounds good, right? It is, at least in some cases. However, here are a few things to think about before you break your checkbook.
- Mutual funds are investments. You can sell the investment or fund it for bigger returns in the future.
- Like any other investment, you stand to make some serious capital gains — capital gains you need to pay taxes for.
- Another issue with mutual funds is the unpredictability of the investment market. Things can go great during a market boom where everyone is investing, but during a recession, you can lose everything overnight.
This is the risk of investing in mutual funds for your child’s college education.
For this reason, go for it only if:
- You’ve got a lot of experience in investing.
- You know what you’re getting into.
- You’re okay with risk.
- You have a plan B.
If you want to learn more about investment, we can help.
Prepaid Tuition Programs
A while back, we visited the idea of asking a university of your choice about its tuition fees. If you’re serious about your child attending this university, you can already pay the tuition fee — in advance.
You heard it right! Some universities allow parents to pay for tuition ahead of their child’s attendance.
Here’s the kicker — there is a fixed fee! This means you won’t have to worry about price fluctuations.
On top of being able to pay in advance, you can also pay the total cost in installments. Universities allow enrollees in their prepaid tuition programs to break down the costs into manageable chunks.
The only drawback seems to be that you’ll only be able to pay tuition — nothing else. Then again, having one thing paid for is better than none, right?
Step #4: Make Your Initial Deposit
Again, not all college fund plans require an initial investment. If you do deposit, you’ll at least know that you’ve got some money in a fund already.
The minimum deposit or investment can depend on the bank or financial institution. You’ll want to choose an institution or credit union that makes the process easy for you.
You should go with an institution that allows you to do the following:
- Pick investments
- Allow you to fund your college savings plan from any bank
- Apply for plans or accounts easily
After all, saving a lot of money for college is hard enough.
Bonus Step: Consider Other Ways to Finance a College Education — Scholarships
Loans and college funds are the best way to pay for college, but if you don’t meet an institution’s criteria, there are other options.
For example, does your kid excel in any subject? Is he or she an athlete, or do they play an instrument?
Scholarships can shave a lot of the costs of college off. On top of saving you money, it can also look good on your child’s resume when he or she graduates.
In Closing
It may cost you a bit, but starting a college fund for your child isn’t rocket science. It’s best done early with the right estimate in mind.
You just need to pick a college education plan that works for you and make the initial deposit. Funding is a matter of which you choose and how much money you can set aside.
Investment is an excellent way to gain funding for your child’s education, but you need to choose the right financial service.
Look no further than 121 Financial! Check out our financial services for investments you can afford to make.
At 121 Financial Credit Union, we put your finances at the heart of all we do!