Key insights:
- There are several ways to save for college, from 529 plans to custodial accounts, and the earlier you start saving, the easier it may be to meet your goals
- The right savings strategy depends on your income, flexibility and goals
- Using automatic withdrawals, setting milestones and increasing contributions as you get closer to your child’s graduation are some key ways to save money for college
College is a major milestone in many people’s lives. For parents, it can also be a source of financial stress. Saving for college requires some financial planning, but starting early and using the right tools can help simplify your strategy. There are several ways to save for college that can help maximize your savings and reduce your costs.
Let’s explore some of the key ways to save money for college and what to consider when choosing an approach.
When should you start saving for college?
When it comes to saving for anything, the earlier you start, the better. When you put money into a savings account, your funds compound interest on a regular basis. Starting to save earlier means more opportunity to accumulate interest, so even small contributions can grow meaningfully. Likewise, the earlier you contribute funds to an investment account, the more time there is to realize stronger returns.
Starting to save early could also reduce your reliance on loans in the long run.
How can you save for kids’ college education?
There are a few specialized financial tools available to you for saving for your child’s college education. Some of the most common ones 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. Your contributions are not federally tax-deductible, although some states may offer deductions or credits.
- 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 your child reaches a certain age can they access the account’s funds.
- Roth IRAs: Although Roth IRAs are designed for retirement savings, if you meet certain requirements you could be allowed to withdraw your contributions tax-free for qualified expenses, including college. Importantly, this does not mean you can withdraw your earnings. If you're just shy of affording tuition and want to avoid taking out a loan, a Roth IRA may be able to help.
How do I choose the best college savings strategy?
There are several ways to save for college, and the best method for your family may not be the best for someone else. 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, like a UGMA and UTMA.
- 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 when your child is younger, and then strive to make contributions that align with securing your own future retirement.
Tips for saving consistently over time
While each person must determine which strategies work best for them, these tips may provide some guidance to help you reach your financial goals:
- Set up automatic contributions: When you connect your savings account to your 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 money for your child’s education once you understand the final costs.
How do financial aid and scholarships impact saving?
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 strong savings strategy can help you handle the bills later. Whether you choose to open a 529 plan, an ESA, a custodial account or a savings account, starting to save earlier may benefit you down the road.
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.
