College Planning & Saving Options
Start saving today and take advantage of various options.
Funding an education is an important goal that requires a lot of planning. With the rising cost of higher education, planning ahead for your children’s future is a great gift that can help them get ahead in life.
The Cost of Higher Education
The College Board estimates that the average annual cost of tuition and fees at a public university in 2015 is over $9,000 per year on average for in-state students, and over $22,000 for out-of-state students. Looking to send your child to a private college? The average cost last year was over $31,000 per year. Those figures do not include housing, books, or food. Factoring in housing, food and books, here’s what the total costs for a four-year degree would be using these figures:
- In-state student, public college/university: $39,508
- Out-of-state student, public college/university: $97,690
- Private college/university: $135,010
Long-term saving for college and other education expenses takes commitment. The
sooner you can start saving, the greater your savings will be. Here are some options
to consider to help you get started saving for college while your children are
A 529 plan is a savings plan with tax advantages that’s made to help families save for their children’s education. These plans help parents save for their children’s college expenses by not being subject to federal taxes and sometimes state tax when used for qualified education expenses.
Most states offer their own 529 plans, but you don’t necessarily need to live in a particular state to invest in its plan. Often the 529 plan in your state of residence offers the most tax advantages, but take some time to research the differences. The most popular 529 option structures the plan as a savings account that offers different investment portfolios. Some portfolios are age-based, meaning you’ll invest aggressively early on in growth-based securities such as U.S. and international stocks. The portfolio then automatically reallocates to more conservative investments as the child approaches college age. Another choice is to create an individualized portfolio in which you determine your investment strategy and adjust it as necessary to meet your risk tolerance. Investment options are determined by the investment company that administers the state program.
Coverdells and Custodial Accounts
Another option is to invest in a Coverdell Education Savings Account (ESA) or a Custodial brokerage account. ESAs are tax-advantaged investments that help cover education expenses, even for private elementary or high schools. With an ESA, you’ll be limited to a $2,000 contribution each year per beneficiary. Once your child turns 18, they will be able to use the funds for whatever they want if they decide not to go to college. You can also transfer money from a custodial account to a 529 plan if they accept transfers. Learn more about this account via Finra.org.
Did you know you can also use a Roth IRA to save for college? With a Roth IRA, you can withdraw money tax-free to help pay for qualified education expenses after five years. What’s great about using this form of savings is that if your child decides not to go to college, you can use the money for your own retirement. Just make sure to talk to a financial advisor to learn about the contribution limits and rules to make full use of this savings vehicle.
Knowing your options for college planning is a great first step.