Money Milestones: How to Pay for Your Child's College Education

Parents of young children have good reason to worry about the rising price of higher education. If you think college is expensive now, the projected future costs might leave you wondering how your kid can afford it — especially since relying on student loans could leave them saddled with debt. If you want to help your child afford a future college education, you can start while they’re young. The earlier you get started, the more you can help reduce the financial burden.

1. Start a College Fund

There are many ways to save for a child’s future education. You can open a traditional savings account, a high-yield savings account to keep up with inflation, a college-focused plan like a 529, or even an individual retirement account.

"Coverdell Education Savings Accounts, 529 savings plans, and even Roth IRAs are tax-advantaged accounts that can be used to pay for college. The sooner these vehicles are funded, the more time they have to grow over time," said Ryan Firth, certified public accountant and president at Mercer Street, a financial and tax services firm.

Firth recommends choosing a 529 or Coverdell Education Savings Account in most cases, both of which were specifically created for educational expenses.

529 Plans

A 529 plan is a tax-advantaged savings and investment account that helps families save for college. Every state offers its own 529 plan, but participants can choose plans across state lines. While contributions to 529 plans aren’t exempt from federal taxes, there may be state tax incentives for participating in the plan offered by your state of residence.

There are two main types of 529 plans:

• Prepaid Tuition Plans: These plans let you buy future college credits at today’s tuition rates, locking in what will almost certainly be a lower cost. The main benefit is that you’re protecting your child from the rising cost of tuition without risking your contributions with investments. However, these plans generally cover tuition and fees only, and may be restricted to in-state residents and schools.

• Investment Plans: More common than prepaid plans, investment 529s allow contributions to be invested in a portfolio of stocks, bonds, and other securities. The main benefit is that earnings and growth are tax-free as long as the withdrawals are used for eligible expenses such as tuition, books, and room and board. Age-based 529 plans automatically shift investments from higher-risk securities to more conservative investments as the plan matures, while custom 529 plans allow you to manage investments yourself.

Coverdell ESAs

Coverdell Education Savings Accounts (ESAs) can be opened at any financial institution that offers them. Much like 529s, contributions to Coverdell ESAs can be rolled into different investments. While contributions aren’t tax-exempt, earnings and withdrawals are tax-free as long as they’re used for eligible expenses.

Coverdell ESAs have an annual contribution limit of $2,000 per beneficiary and must be used by the time the beneficiary reaches age 30.

2. Start Saving for College

You don’t have to start saving as soon as you have a child, but it’s a good idea to get started early. The more time you give yourself to save, the bigger your child’s college fund can grow. Whether you have a specific savings goal in mind or you just want to save as much as you can, starting early can help you get there.

Whether you’re building your child’s college fund in a 529, Coverdell ESA, IRA, or a traditional savings account, the key is to save regularly and frequently. Add a college savings contribution into your monthly budget and consider contributing extra whenever you come into some unexpected income. However, ensure your savings are realistic for your budget and don’t detract from other priorities.

"Retirement security should take priority over paying for college. Parents should try not to sacrifice their retirement so that they can pay for their child's education. It's easy to borrow money to pay for college, but it's much more difficult to borrow money to fund retirement," said Firth.

You can also get friends and family involved in saving. When holidays and birthdays roll around, consider asking for a contribution to your child’s college fund instead of the latest toy or gadget. Over time, gift contributions can help boost your child’s savings.

3. Get Your Child Involved in Saving for College

Once your child is ready, you can get them involved in saving for college. Encourage your child to contribute to their college savings from an allowance or part-time job. This not only helps grow the fund faster but also teaches them about saving and the true cost of college.

4. Look for Ways to Reduce the Cost of College

Just because college is expensive doesn't mean that the full cost is unavoidable. You can start looking for potential ways to lower the cost of college early on. Some strategies include:

• Enrolling gifted children in Advanced Placement (AP) high school courses that earn college credits.
• Having your child attend community college for two years before transferring to a four-year university.
• Encouraging your child to get a part-time job to help them afford college expenses.
• Working on paying down student loans while enrolled in college to reduce future debt.
• Searching for scholarships and grants that will help reduce tuition costs.

"Students might want to consider attending a community college for the first year or two and then transfer to a more expensive college or university where they can complete their degree(s)," said Firth.

Want to explore more ways to save for college? Check out our guide to 529 plans.

Description: A family saving money for their child's future college education, emphasizing the importance of starting early and exploring various savings plans.