One of the most rewarding parts of raising kids is guiding them through life decisions and helping to set them up for success. One of the best ways to see your child succeed is to ensure that they have access to a college education and all its benefits.
With the rising costs of tuition, figuring out how to save for your child’s college education can be daunting. Thirty percent of parents feel overwhelmed when they think about saving for college* and with good reason.
According to the College Board, the average published cost of yearly tuition and fees is $32,410 at private colleges, $9,410 for state residents at public colleges, and $23,890 for out-of-state residents at public colleges. Even if your child attends a relatively affordable school, a four-year degree could cost upwards of $40,000—if they graduate on time.
However, college is still a strong investment in your child’s future. On average, college graduates earned 56% more than those with just a high school diploma in 2015.
It’s never too early to start saving for your child’s education. Even $50 a month invested today can make a big difference by the time your child graduates from high school.
Many parents set aside college savings in traditional checking or savings accounts, but money in these accounts is easy to access and accumulates little or no interest. Instead, consider using an investment account as a college savings vehicle. These accounts not only allow your money to grow but may also offer tax benefits.
A Coverdell Education Savings Account (ESA) is an excellent vehicle to grow college savings. This type of account can be used to cover most educational expenses, including pre-college costs like private school tuition. In addition, an ESA is considered the parent’s asset, not the child’s, so the account will have less impact on your child’s chances of receiving federal aid.
You can only contribute $2,000 a year to an ESA, so if you need to save up more money—which may well be the case—you may need to consider another way to save.
A Roth IRA is a popular tax-advantaged savings account. While these accounts are generally used for retirement savings, they can also be put to use as a vehicle for college savings. After-tax funds can be contributed to a Roth IRA, and any gains can later be withdrawn tax-free, usually after age 59½ for retirement income. However, with this type of account, you are also able to withdraw funds to pay for your child’s qualifying education expenses, and those funds may be penalty free.
While a Roth IRA also has income and contribution limits, it allows for more freedom than an ESA. And if your child decides not to attend college, then the money in that account can be used for your retirement.
Unsure where to find money to set aside for your child’s education? Check out our 52 Ways to Save eBook.
For more information on creating a college savings plan, contact us today at 888.616.5243 or firstname.lastname@example.org.
*How America Saves for College 2016, Sallie Mae, p. 18