College tuition prices are astronomical today. Likely, by the time your young child is of age to go to college, prices will be even higher. Beginning a savings plan for college in early childhood makes sense, but the options for saving this funding can be a little bit confusing and new to many families. Read on to learn about options which may help your family reach their goals.
Generations of families have opened a savings account, separate from their checking account and any other existing savings accounts, for the sole purpose of saving money for their children’s education. It is certainly the most simple way to save funds. However, you may want to consider a few key factors before making the savings account your primary mechanism for saving for college. First, if you set up the account in your child’s name, your child may have a more difficult time obtaining financial aid from the college of their choice. Regardless of whose name is on the account, these savings account typically yield less than other savings solutions.
529 College Savings Plans
529 college savings plans function much in the same way that a Roth IRA does, letting parents invest money after taxes in a diversified portfolio of stock and bond funds. Parents may then withdraw the funds tax-free when ready to utilize the money for college expenses. This savings mechanism has the advantage of offering gains which are tax-deferred, and the gains can be greater than a traditional savings account. You may want to be aware that funds invested are intended to be used for either college or graduate school. If your child chooses not to go to college, you will need to change the beneficiary to another college-bound student. Money withdrawn early or spent on expenses other than college or graduate school is subject to penalties.
Prepaid tuition plans
Prepaid tuition plans are designed for families who are planning to send their children to in-state, public universities. These plans allow parents to pay for tuition credits in advance. Families benefit from this plan by pre-paying, for example, $10,000 for a certain number of tuition credits, and receiving the same number of credits in the future which may be worth much more money at the time one’s child attends college. Plus, these plans avoid the possibility of funds being negatively impacted by the stock market. However, if a child changes their mind and decides to attend school out of state, or decides on a private university, the family will receive a return of their money, but won’t benefit from the full value of the plan.
If you haven’t begun to save money for your child’s college education, consider speaking with a financial planner to choose a mechanism for saving that works for your family.