When families talk about college, the subject of money is never far behind. Seeing so many graduates overloaded with student loan debt, with 19% of borrowers owing more than $50,000 upon graduation, can be pretty scary for parents and students alike.
As parents, you think the best thing you can do for your children is to encourage them to go to college and get a good education — and, hopefully, that will help them land good jobs with higher earning power than if they had high school diplomas alone. But that’s an expensive goal. It’s especially daunting considering that many parents are still paying off their own student loans, while their children born today could end up paying up to four times the current price for tuition if inflation keeps up, according to finaid.org.
But where do you start saving for your child’s education? The option for many is to not start at all. Only 36% of middle-income families and 29% of low-income families are putting money away for their kids’ college fund, according to a study by Sallie Mae. The study also found that the average family is planning to save around $38,953 per child for college, but on average will only save about $19,784.
Here are some ways to start saving for your child’s education, and tips to help them fund their education in other ways as well:
529 College Plans
More than 30 states offer a 529 college savings plan, also known as Qualified Tuition Programs (QTP). Here’s how they work: You typically invest after-tax money into the plan, and you’re then allowed to withdraw the funds (and any investment gains) tax-free for use toward qualified education expenses, such as college tuition and books. Each state’s plan offers various investment options, annual fees, and operating costs. Contribution limits vary, but tend to be quite high compared to Roth IRAs.
A Roth IRA is a popular type of tax-advantaged retirement savings account, but it can also be used as a college savings vehicle. Like 529 plans, you contribute after-tax money, and any investment gains can be withdrawn later tax-free — most often, after age 59-1/2, for retirement.
But Roth IRAs also allow you to take out funds tax- and penalty-free to pay for qualifying educational expenses after five years. (You can also tap a Roth IRA without penalty to make a down payment on a house.) That makes it an appealing way to hedge your bets: If you’re child doesn’t go to college, you can still use the funds for your retirement.
Gift of College
This program allows other family members and friends to give a gift directly to your 529 college savings plan. It’s free for you to register, but there is a 5% processing fee (up to $15 per transaction) when you receive a gift.
You create a profile for your child, and your family and friends can give a gift that way. Instead of giving toys or clothes for birthdays, holidays, or other occasions, ask loved ones to make a gift this way, as it can make a more lasting impact on a child’s life.