The Best College Savings Options for Every Parent and Every Budget

The Best College Savings Options for Every Parent and Every Budget
  • Opening Intro -

    Parents from all walks of life share one goal in common: They want the best for their kids.

    That could mean a lot of different things. For many, though, it still means a college education. And that costs money.

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A study by Sallie Mae found that families paid an average of $30,017 for higher education in the 2019-2020 academic year. Parent savings made up a much bigger chunk of that than the year before: 44% compared with 30%.

You probably want your children to depend on student loans as little as possible. You want them ultimately to make a good income and not spend half a lifetime paying back their loans.

You will want to help. But unless you’re extremely wealthy, this means you’ll have to start saving for your children’s education when they’re still young.

You’ll also need to decide where you want to send them to school. That will depend on their goals, their ability to meet entrance qualifications, and of course, their financial resources.

Enrolling at an Ivy League college of course will cost them more, and community colleges will cost less, with a range of options in between.

Regardless of your income and budget, however, you have several options when it comes to saving for the future. Here are some of them.

FDIC-insured savings account

One of the most obvious options available to you is an FDIC-insured savings account at your bank. It’s a safe place to keep your money.

If you choose this option, however, you’ll be relying mostly on whatever principle you can accumulate. The fact is that the interest you earn will be minimal (and taxable).

A high-yield savings account can pay you two or three times as much, but that’s still not going to earn you as much in interest.

529 savings plan

A 529 savings plan is state-sponsored, but you can have plans in states other than the one where you live. These plans offer a key benefit you won’t get with a savings account: They’re not subject to taxation. However, they’re also not tax-deductible.

This can leave you with a conundrum. On the one hand, it’s better to start a plan like this early, to maximize your tax benefits. On the other, you should only open one if you’re pretty sure your child is college-bound, and you may not know that until later.

There are usually no annual contribution limits, and there’s no income-based requirement. But you’ll face penalties on any money left in the account when your child’s education is complete.

Certificate of deposit (CD)

With a CD, you lend money to your bank for a certain period, and it, in turn, lends it to its customers. You’ll earn higher returns than what you would with a savings account. However, you won’t be able to access that money during the period the bank is using it, unless you pay a penalty.

Like a savings account, a CD can be FDIC-insured, making it a safe option.

Prepaying your child’s tuition

In some states, you may have the option to prepay your child’s tuition. This can enable you to lock in current rates. But your child will have to attend a public institution in your state.

So if they find a better option out of state, you’ll have to pay the difference out of pocket. That could be substantial, although there are ways to reduce it.

UGMA or UTMA account

This option will allow you to broaden the scope of your savings plan beyond your child’s education and will give them the freedom to use it however they choose when they become an adult. You can put the funds into assets like mutual funds or real estate.

There’s also a tax advantage, in that funds get taxed at your child’s tax rate, rather than yours.

Borrowing money

If you don’t have enough cash to help your child, taking out a loan is another option. There are advantages and disadvantages to regular borrowing, as opposed to student loans. If you help your child pay off a student loan down the road, and give them too much money to do so, you could face tax liabilities.

On the other hand, if you want to use your own credit, you’ll need to make sure it’s in good shape well ahead of time. Know what it takes to build good credit before you commit to this step.

other related articles of interest:

Roth IRA

Normally, you think of a Roth IRA in terms of retirement, but you can choose to open a Roth IRA in your child’s name, and they can use it for college without incurring an early withdrawal penalty (although they’ll still have to pay taxes).

There is one caveat: They have to have some income of their own to do this, so this option works best if your child has a part-time job. 

Assistance options

You can’t count on grants or scholarships to pay for your child’s education, but you can come up with an estimate of how much assistance you might receive from programs, like FAFSA, that are based on your household income.

These are some of the options you can consider as you look for ways to help your child afford a college education. Choose one that fits with your needs and goals for your child, and your child’s goals, as well.

When they’re old enough, sit down and talk with them about what they want to pursue when it comes to higher education, so you can make an informed decision together.

Image Credit: best college savings options by twenty20.com

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