How to Save for College

Hi Money Masters,

In keeping with the college theme this summer, I thought I’d follow up last week’s “paying for college” discussion with how to SAVE for college! Now that we know how expensive a higher education can really be, we need to hit the gas on the savings aspect of the process. As I mentioned before, some people start saving for college tuition before they become parents, some as their children grow, and some are not able to until much later (if at all).

If you are in a financial position to put aside some money towards college then you have several options.

#1. A Good Old Fashioned Savings Account

A savings account is probably the most basic method of socking away that tuition money. Funds are kept safely in a bank account at your chosen financial institution. Most savings accounts will allow your funds to earn a little in interest as well.

Possible Disadvantages:

You may have to shop around for a better interest rate than your “go-to” bank and some require a minimum balance. Also, keep in mind that the determining factors of financial aid are based on income and assets.

#2. Education Savings Account (ESA)

An ESA is a tax-deferred trust account from the government to help families fund educational expenses for children 18 years old or younger.

Possible Disadvantages: 

There are some restrictions with an ESA such as income limitations and the threshold for contributions is $2,000 per year.

#3. 529 Plan

Many of you may not have heard of a 529 Plan. This is a specific college savings method, also called a “qualified tuition plan” in which the money grows tax-free and is not taxed when withdrawn. Each state has its own 529, however, you are not limited to using your state’s plan.

Possible Disadvantages: 

The funds in a 529 plan are considered when financial aid comes into the picture. This means that a financial aid package could be less if a child has a 529 plan. Also, if you withdraw some funds and use it for another purpose you will need to pay tax as well as a penalty.

#4. An Educational Trust

A trust is set up when a person wants to hold assets (college tuition) on behalf of another person (future college student) with the intention of eventually handing them over. With an educational trust, it is deemed that the money is to be used for educational expenses. However, other purposes can be assigned as well as part of the trust terms.

Possible Disadvantages:

There are varying tax rules that can apply depending on the type of trust that is set up.

Deciding to start saving for college is the first step. The amount is secondary. The goal of saving for 100% of college costs is pretty ambitious for most people. It is suggested that a realistic savings goal is about one third of the total cost. Research the options that are available and you will be on your way!

Blessings to you all,

–Helen