As a parent, you know you should be saving for your child’s college education if at all possible. Saving for college makes it more likely that your child will attend—even if you’re only saving small amounts—and the costs of school are skyrocketing. By the time your child is eighteen, there’s no telling how high tuition will be.
But how do you go from knowing you need to save money to actually saving it? Here are four vehicles you can use to build your savings as your child grows.
College Savings Plans
529 accounts allow you to invest money for your child’s education. Some states do not tax the money you put in, and withdrawals are not taxed as long as you use the money for qualified educational expenses.
They are run at the state level, and you don’t necessarily have to live in a state to use its plan. There are two basic types of 529 accounts: college savings plans and prepaid tuition plans.
College Savings Plans
If you’re thinking about opening an out-of-state plan, or you’re not 100% sure if your child will want to go to an in-state college, you’ll likely want to look at a college savings plan. These plans invest your money in the market, and most of them get progressively more conservative as your child nears college age—protecting your investments to a certain degree.
These plans are beneficial because they can usually be used nationwide, and you can use any money saved for costs beyond tuition like books, room and board, and other college-related expenses. Additionally, the new tax bill allows parents to withdraw $10,000/year for K-12 expenses without incurring taxes.
PrePaid Tuition Plans
If you’re purchasing a prepaid tuition plan, you’re likely doing it in your state of residence. Generally speaking, these plans allow you to purchase a certain amount of credit hours at today’s tuition rates, but your child will be able to use them in the future—even if tuition has gone up.
So if one credit hour at a state school today costs $750, you can purchase it at $750. Then, when your child goes to school ten years later, they won’t have to pay any money, even though credit hours may have gone up to $1,300 per hour.
Before opening a prepaid tuition plan, remember that your child will likely be limited to in-state schools. These plans also come with time tables for when you can buy credit hours and at this year’s price point, and some may have age or grade level limits.
Coverdell Educational Savings Accounts (ESAs)
Coverdell ESAs are another tax-advantaged way to invest in the market for your child’s education. However, while there are no hard and fast federal limits on how much you can contribute to a 529, you can only commit $2,000/year to a Coverdell ESA. It also comes with income limits; if your modified adjusted gross income on your taxes is $110,000 or more—or $220,000 or more for married couples filing jointly—you cannot open this type of account.
Coverdell ESAs tend to come with more investment options and sometimes have lower fees than 529s, however. This money can be used for K-12 educational expenses, as well, without incurring tax upon withdrawal.
If you have a child with a disability, you can open an ABLE account for them. These accounts shelter your money from asset tests, and allow you to spend it flexibly.
Maybe you don’t know if your child is going to go to college or not, but you want to save for them regardless. The money in an ABLE account can be used for college, but qualified expenses also include an array of things your child may need—from medical expenses to rent money. That means that even if college isn’t a path they want to pursue, the money you’ve saved will still serve them well in adulthood.
Maximum yearly contributions are $15,000.
Educational Savings Bonds
Millennials probably remember their parents or grandparents buying them EE series savings bonds. These bonds are not taxed when you use them—as long as you are using them for educational expenses.
EE series savings bonds are a very safe investment, but they’re not going to get you a high return. For example, if you purchased an educational savings bond today, it would only earn 0.10% interest for the first twenty years. During this time frame, the Treasury will decide the rate for the last ten years of its life before maturity.
You can get a high-yield savings account that offers an interest rate north of 1.00% these days. Neither rate of return is good, but educational savings bonds are the less ideal of the two.
Which plan is right for me?
Educational savings bonds are not right for anyone at the current moment as there are far more lucrative ways to save money for higher education.
If you have a disabled child and don’t plan on contributing more than $15,000/year, an ABLE account is likely the best bet for you.
If you don’t plan on socking away more than $2,000/year, Coverdell ESAs are attractive with their lower fees and wider array of investment options.
If you’re confident your child will go to school in state, a prepaid 529 account can be a great way to go. For parents who aren’t willing to take the gamble with their child’s future college attendance decision, college savings plans offer great flexibility with a ton of tax benefits.
It’s wise to sit down with a financial professional before making your final decision. They can take a holistic look at your entire investment portfolio and financial situation, and give customized advice. Now that you’ve done a little research, though, you’ll know what they’re talking about when you go in to meet them, and can start making strides toward the plan that’s right for your family.
When you’re sending your child away to college, you might have a lot of advice for them. Study hard. Enjoy these years. Make friends. Explore your interests.
While you’re digging into all the fun and studious topics, be sure not to shrink from the subject of finances. This is likely the most autonomous your child has ever been with their money, and you want to make sure you’re setting them up for success.
Here are some questions to guide them through so they won’t completely bomb College Finances 101.
How Do I Pay for College?
You can’t manage money if you don’t have any. The very first think you’ll need to discuss with your child is how they will get their hands on cash.
Tuition and Fees
This conversation should start almost a year out with tuition and fees. While it may be tempting to inform rather than guide, give them space to figure this out themselves. Be there to answer questions and offer helpful insights, but once they’re informed, allow them to make decisions on their own.Start off by pointing them to the Free Application for Federal Student Aid (FAFSA). FAFSA applications open every year on October 1. You will either need to offer help or paperwork as they’ll need to provide your financial information to determine their aid package.After filling out the application, your child will be offered grants, work-study opportunities, student loans or some combination of the three. Talk to them about how grants are free money they won’t have to pay back. Talk to them about how on-campus work-study jobs may apply their paycheck directly to their tuition bill.Most importantly, talk to them about the consequences of student loans. Some students may need loans as a last resort to fund their schooling, but others take out an amount in excess of what they need in order to fund their lifestyle. Explain how they’ll be paying interest on this money for years to come, and that a better way to fund their current needs is to get a job.Before they take out those loans, be sure to explain that scholarships—like grants—never have to be paid back. Writing a few essays is a small price to pay to avoid debt.
Your college student will need money for other expenses besides tuition and fees. Where will that money come from?The two most likely sources—aside from the undesirable option of student loans—are a part-time job or you, the parent.If you are providing funding, explain how much you can give. If they find it’s not enough to cover their expenses, encourage them to get a job. Note that students who have on-campus jobs and work 20 hours or less per week actuallyhave higher grades than those who do not. The same does not hold true for off-campus jobs.
Where will you keep your money?
This may be the first time your child has to manage their own checking account. There will be a couple of factors they’ll want to consider.
Brick and Mortar vs Online Banking
In the past, the best option for student banking was typically provided by a bank or credit union close to campus. Some schools even have a financial institution located on campus. This allowed students to complete necessary transactions completely autonomously—in person.Today, online financial institutions tend to offer higher interest rates on deposit accounts and the same convenient access to services without the need for a brick and mortar location. You can deposit checks, transfer money and pay bills all with the swipe of a finger.If, however, your child has a job or budgeting style where they’re frequently using cash, they’ll want to check with the financial institution to see how they handle deposits. Some online banks won’t deal with cash at all on the deposit side.
Student Account vs Joint Account
Getting a joint account with your student allows you to deposit money into their bank account—even from far away—without hassle. This method works best if you’re using an online bank or an institution that is accessible both where you live and where your child is going to school.With today’s technology, though, you may just want to let them have their own student account with that brick-and-mortar option near campus. You can PayPal or Venmo them money, and student accounts tend to come with a lot of perks. Here are just a few:· Fewer or lower fees· Incentivized savings programs· Easier to open up a student credit card without a credit history
How are you going to build credit?
Your high school grad likely doesn’t have a credit history. That’s fine now, but when they graduate, they might want to take out a car loan or get an apartment. They’ll be better equipped for both of these tasks if they have a positive credit history.You may have cringed when we mentioned student credit cards above, but know that today’s student cards aren’t offered in the same way they were while we at school. First of all, lenders are no longer allowed to hawk college campuses with free frisbees and coffee mugs. This has reduced many predatory practices.Secondly, a credit card is an easy way for your child to build their credit. They must understand the gravity of their decisions before using it. They need to understand that they shouldn’t spend more than 10%-20% of their credit limit. They need to understand the consequences of high credit card interest rates. They need to pay off their balance in full every single billing cycle.But if they do these things, a credit card can actually be a positive move. They’ll graduate far ahead of their peers, ready to take advantage of the best interest rates banks have to offer when they inevitably have to borrow money in the future thanks to their stellar credit score.If you want to keep a closer eye on their habits, another option is to open up a joint credit card account with them. Be careful though; if the credit limit is too high and you have a big spender, one mistake could result in poor credit not just for them—but for you, too.
What does your budget look like?
Yes, your child is going to have to budget. And, yes, they’re going to have to do it independent of you.That means that instead of going over every line item with them, it may be better to let them create a budget on their own and then have them explain it to you when they’re done. This lets them feel more in control of their own situation, and helps them build skills they will need throughout the rest of their life. If there are any red flags or glaring errors, you can point them out and offer potential solutions after they’ve laid all their numbers out for you in black and white.Here are some of the things that should definitely be in their budget.
Is it cheaper to have a meal plan or buy and cook your own food? Depending on their housing situation, cooking may not even be possible. But there is usually more than one meal plan option to choose from. Have them run the numbers against their stomach, making sure they don’t make a decision that will turn them into a starving college student in the literal sense.
On-campus or off-campus housing? Usually on-campus will be cheaper, but there are some downsides like not being able to cook your own food. But you’re also not typically responsible for utilities when you’re staying in a property owned by the school.Have them weigh the pros and cons of each, keeping in mind that numbers aren’t the only consideration. Experiencing at least one year of on-campus living can be a great way to establish new friendships and engage in school culture. On top of that, there are some schools that disallow freshmen from living anywhere but the dorms.
If your child receives grants, scholarships or loans in excess of their tuition, the school will most likely let them use the surplus money for textbooks. Some even allow students to credit their account directly from the campus bookstore.Point out to your child that while this practice is convenient, it’s not the best economic decision. They can buy used books online or from another student for a fraction of the price they’ll find in the bookstore.Also remind them that some professors don’t really require the textbook--even if it is listed as “mandatory.” If they can get in touch with the professor before the semester begins to find out their policies, they may be able to cut a big line item out of their budget altogether.
Laptops are all but a necessity for today’s college student, and your child may require more depending on their major. If this is something you’re covering, it doesn’t need to be in their budget. But if they’re fending for themselves, remind them to save a bit throughout the year for inevitable maintenance or replacements.
You child may or may not be taking a vehicle to school. If they are, remind them of any associated financial responsibilities like gas, insurance, parking permits or auto loan payments.Some schools—especially in urban settings—will include free public transport in the cost of their tuition. If your child does not have a vehicle or access to this perk, be sure they’re budgeting in at least a little bit of money to get around.Some birds fly far from the nest. If school is far from home, remind them that they’ll need plane tickets or road trip money at least four times per year.
Yes, college students should live lean. But pretending they’re never going to go out is setting them up for budgetary failure. Make sure they have a realistic amount of money set aside for outings with friends, and remind them that if they have more month than money, the student life office likely has a slew of free events they can take advantage of.
What are your financial goals?
All of us, regardless of age, should have financial goals. Talk to your college student about theirs, and then ask them how they plan to achieve them. Some common financial goals for college students include:· A semester abroad.· Graduating debt free.· Vacationing with friends for Spring Break.· Saving up for the deposit on their first apartment.
Do you have Excel downloaded onto your computer?
You’ll always be your child’s parent; you’ll always be there to help them when they need it. But at this point in their life, you need to be their financial Yoda—offering them guidance and perspective, but not lifting the fiscal X-wing out of the swamp for them. Have money conversations and make sure they have Excel downloaded onto their computer, but don’t fill out the budget spreadsheet for them.