According to Sallie Mae, only 36 percent of middle-income households set aside money for a child’s college fund, but saving is more important now than ever. The cost of a higher education continues to grow, which has led to more than $1.4 trillion in outstanding student loan debt. The average student loan borrower today graduates college with at least $50,000 in debt. Jan Gleisner, a trusted San Diego financial planner, explains how you can better save for your child’s college expenses.
529 College Savings Plans
These special plans, which are the most popular way to save for college, work like an IRA or 401(k) to save money for education tax-free. All gains on your account are tax-deferred, and you will never pay taxes as long as the money is used for qualified education expenses. Because the savings belong to you, not your child, a 529 plan will not threaten financial aid or scholarships. There are two types of 529 plans: those sold directly by states and those sold through financial advisers. Each option comes with benefits. Many states offer a tax deduction or credit for contributing to a 529 plan.
An alternative to a 529 plan is a UGMA or UTMA custodial account. These accounts allow you to hold gift money in a custodial account until the child reaches adulthood. Custodial accounts may offer tax perks, but not as many as 529 plans. A major drawback is the money will be considered your child’s when it comes to financial aid. When the child reaches adulthood, the money can also be used for anything, college or otherwise.
Coverdell ESA Accounts
A Coverdell ESA is similar to a 529, as this tax-advantaged plan belongs to you, not your child. It can be used to pay for a wider range of educational costs than a 529 plan, such as K-12 private tuition. The drawback is you can only contribute $2,000 per child per year.
Paying for your child’s future college expenses doesn’t always require a special savings account. If you have a lump sum of money available, you may be able to prepay your child’s tuition years in advance. Many states allow you to pay for tuition credits at today’s price to protect you from tuition hikes when it’s time for your child to attend. These prepaid tuition plans are best if you know your child will attend college in-state. If your child goes to college out of state, you can get the money back, but there will be a penalty.
The 2K Rule for College Savings
It can be difficult to set a goal for your child’s college fund, as college costs vary a great deal based on the school and whether your child receives financial aid or scholarships. On average, 529 plan investors have around $32,500 when their child reaches 17. As a general rule to help you save, multiply your child’s current age by $2,000 to cover 50 percent of the cost of a 4-year public university.
If you need more extensive help figuring out the best ways to save for your child’s tuition, consider hiring a financial advisor. Jan Gleisner has over 16 years of experience in the financial services industry and can help your family achieve your financial goals. Don’t hesitate to get in touch today.