As the cost of education and competitiveness among students rises year over year, parents may be at a loss at figuring out the best ways to help their child succeed academically. After all, according to data reported to U.S. News in an annual survey last year, the average tuition for the 2019-2020 school year ranged from $41,426 (for private colleges) to $11,260 (for state colleges). That’s the average tuition per year. Add on books, administration fees, meals, and living costs, and you’re looking at a major life decision with considerable financial cost. With no indication that higher education costs are going to change, it’s more than likely that your children will be paying more for college than you did. If you’re wondering how to start saving for your child’s education but not sure where to get started, keep reading below:
Keeping all that uncertainty in mind, would college even be a viable option for your child when they’re ready to pursue higher education or a career? Maybe you don’t want to save specifically for college and instead want your child to be able to pursue other goals (traveling, trade school, their own business, for example). When it comes to building a nest egg, a general savings account may be the best route to go. Custodial savings accounts let you open a savings account under your child’s name. When your child is old enough (this can be different depending on the bank or the state), they will have full control over the assets in the account. Once your child is old enough for summer jobs or allowances, you can use the custodial account as a way to teach them how to save part of their income.
If you have children or other dependents, part of your financial planning should include getting the right life insurance for your situation. When you contribute to a life insurance plan, many providers allow you to build excess cash value that is tax-deferred. Parents or grandparents sometimes have the option of using this cash value to fund a child’s education. Read up on your policy or get in touch with your provider to find out if this is an option for you.
No matter what measures you take to optimize college savings, you will have to depend on your child to make the right choices concerning those funds. This is why it’s so important to teach your child the basics of personal finance and expose them to financial knowledge early on. You might have grown up in an environment in which money was a taboo topic, but it doesn’t have to be that way for the next generation. A 2014 study from North Carolina State University and the University of Texas found that children pay close attention to issues related to money. Use this as a teaching opportunity to discuss the pitfalls of debt and the importance of budgeting. If you give your children an allowance, make saving and donating a non-negotiable part of their allowance in order to cement this mindset early on in life.
A 529 plan is possibly the most effective tool available to average Americans to save money for education. A 529 plan is a tax and financial aid benefit plan that allows you to save for educational expenses in the most optimal manner.
Like a Roth IRA, there are no taxes on withdrawals and your money can grow tax free. The withdrawals would traditionally be used for college costs, including tuition, fees, books, room and board. Now, the Tax Cuts and Jobs Act recently expanded the use of 529 accounts so that families with children in private elementary and secondary school can make withdrawals up to $10,000 a year to pay for tuition.
Bonus: Set up a trust and update your will
A few weeks ago, we wrote about the importance of having an up-to-date, legitimate will. When it comes to financial matters, especially for something as critical as your child’s education, the importance of a clear written guideline cannot be overstated. If you have a will drawn already and are wondering how best to pass your assets to a child or dependent, a trust can be a great way to manage, direct, and protect funds. Trusts can give you flexibility in terms of investment options for the funds, the timing and purpose for releasing funds, and more. Depending on the type of trust, there can be specific tax implications so it’s always good to involve an estate planner or tax professional.
For many families, higher education is a significant life decision with huge financial implications. Parents hoping to contribute to a child’s educational and career goals should know what their options are when it comes to saving and investing. 529 plans, trusts, and custodial savings accounts all provide different benefits and advantages—what works for one family may not be the best option for another. Finally—no matter which option you pick —it’s important to teach children about money early on and instill good financial habits that will help them throughout their college life and beyond.