As you prepare for your child’s next steps in life, you might be worried about how you will pay for their education. Saving for college can require some planning, but starting early and using the right tools can help make higher education more affordable.
Let’s explore some strategies for saving for college, how to maximize savings and what to consider when choosing an approach.
Why it’s important to start saving early
When it comes to saving for anything, the earlier you start, the better. When you put money into a savings account, you funds compound interest on a regular basis. Saving earlier means more opportunity to accumulate interest, so even small contributions can grow meaningfully if you start ahead of time. Starting to save early could also reduce your reliance on loans in the long run.
Ways to save for kids’ college education
There are a few different methods at your disposal for saving for your child’s college education. Some different approaches include:
- 529 plans: 529 plans are tax-advantaged accounts for education expenses. Earnings for the account are not federally taxable when used for qualified education expenses, but your contributions are.
- Coverdell Education Savings Accounts (ESAs): An ESA is an account set up for your child that offers tax-free distributions, or withdrawals, to pay for qualified education expenses. Your child must have special needs or be under 18 when the account is set up. As with 529 plans, your contributions aren’t tax-deductible. You must make under a certain income limit that’s set on a yearly basis to contribute to an ESA.
- Custodial accounts: Custodial accounts, like Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors (UTMA) accounts, save money in your child’s name but can be used for more than just education. Only once they reach a certain age can they access the account’s funds.
How to choose the best college savings strategy
Depending on your preferences and your flexibility, there may be different approaches for saving for education. Here are some things to consider:
- Tax advantages and withdrawal rules: Consider how you can navigate tax breaks on your accounts with withdrawal rules. For example, ESA withdrawals may be made without paying taxes when paying for education, but keep in mind that your contributions aren’t deductible.
- Flexibility vs. education-specific use: If you’re unsure if your child will pursue higher education, you might prefer a plan that offers more flexibility. UGMAs and UTMAs save funds for your children in the future, but they may use them freely once they reach a certain age.
- Consider your income, goals and your child’s age: You don’t want your savings strategy to overly strain you financially, so you may want to contribute what you can as your child is younger, and then strive to contribute more in the future as they get closer to college age.
Tips for saving consistently over time /
Here are a few different tips to save for college:
- Set up automatic contributions: When you connect your savings account to your regular checking account, you may be able to contribute regularly to your savings account without having to think about transferring funds.
- Increase contributions gradually over time: As your child gets closer to college, you may want to consider adding more funds to your savings accounts. Starting to prioritize college savings over other expenses could be beneficial when it comes time to pay tuition.
- Set savings milestones: Creating goals for saving can make it easier to manage over a long period of time. For example, you may want to set a savings goal for when your child reaches fifth grade, and then another goal for when they reach eighth grade.
- Reevaluate your plan as college approaches: You might change your calculations for your savings as you learn more about tuition fees and costs. Depending on what you’ve saved up, you may need to allocate more or less money for your child’s education once you understand the final costs.
Don’t overlook financial aid and scholarships
Savings accounts for education can work in tandem with financial aid. Many families still use loans, scholarships or grants when they send their children to college. At the same time, the amount you have saved can help make your college financial planning strategy more robust. Also, by reducing the amount of debt your child needs to take on for college, you could help make their financial future more stable when they graduate.
Plan for college expenses in a way that works for you
College tuition can be expensive, but finding a strategy that helps you save in a way that works for you can go a long way toward allowing you to handle the bills later. Whether you choose to open a 529 plan, an ESA, a custodial account or a high-yield savings account, starting to save earlier may benefit you down the road.
Reach out to a financial planner today to get professional advice tailored to your income and financial goals on how to save for future college bills.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
