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Best Way to Save for College

The price of college is astronomically high and only getting higher as the future progresses! Despite the cost of education, having a formal degree is still incredibly valuable and can open the door to more possibilities.

Whether you are looking to put yourself through college, or you’re preparing to put your kids through college, you’ll need to know the best ways to save for college to make this expense easier to digest. Let’s dive in and help you figure out how you can pay for college. 

Start Now

As with any major life expense, the more visibility and time you have to prepare, the better off you’ll be. If you plan on sending your kids through college in the future, start planning now!

There are various college savings plans that can help you do just that. Time and compounding interest are the greatest wealth generating tools ever created.

Combining them is an unstoppable force, and the sooner you get started, the more time these forces have to work. 

What Is the Best Account to Save for College? 

There are numerous college savings plans that can help you squirrel away money for a college fund. The best way to save for college is by leveraging one of the following investment options. 

529 Plan

A 529 plan is a great investment option that can be part of your college savings plans. A 529 is an investment account that is specifically designed to help one save money for college.

The account owner elects a beneficiary, which is typically the account holder’s children. These college savings plans offer tremendous income tax breaks, and the income that grows within a 529 account grows tax free.

Not only does the income grow tax free, the money is not taxed upon withdrawal if used to pay for tuition. Check out this article to learn how to open a 529 savings account.

What to Like: 

  • The account owner can contribute money out of their paycheck each week to a 529 account
  • The money grows tax free and reduces one’s taxable income in the present year
  • Withdrawing the money, when used for tuition, does not trigger a tax

What Not to Like: 

  • You can only change your investment options twice per calendar year 
  • Your child may not want to go to college; if that’s the case, you will face a penalty if this money is used for anything other than education 
  • There is less control over your investment options 

Where to sign up:

Custodial Accounts: UTMA / UGMA

A UGMA and UTMA are custodial accounts. The account is controlled by the parent or relative, but the account itself is in the child’s name.

Once the child becomes an adult, this account automatically transfers full ownership and control over to them. 

What to Like: 

  • There is a great deal of flexibility with a UGMA or UTMA. These accounts can be used as one of the best ways to save for college, but they can be used for other purposes as well without facing a penalty
  • There is no contribution limit 
  • These accounts can invest in a wide range of investments, including stocks, bonds, ETFs, and mutual funds

What Not to Like: 

  • These accounts are technically an asset for the child applying for college, which may reduce their eligibility for financial aid
  • An UTMA and UGMA does not provide the same tax benefits as a 529 plan

Where to sign up:

  • Large national banks, such as Bank of America, will have custodial account options 
  • Fidelity also offers a competitive custodial account that you can open directly from the comfort of your own home 

Education Savings Account (ESA)

Also known as a Coverdell education savings accounts, an ESA is a savings account that helps a family pay for education expenses. These accounts do not only help families figure out how to pay for college, but these accounts can also help fund educational expenses from grades K-12. 

What to Like: 

  • Similar to a 529 plan, an ESA offers tax benefits
  • The investment options are almost limitless 
  • These accounts can fund educational expenses, not just college tuition

What Not to Like: 

  • You can’t contribute to an ESA if you’re a married couple that makes more than $220,000 
  • You can’t contribute more than $2,000 per year, per child 

Where to sign up:

  • Most online brokerages, such as TD Ameritrade, Charles Schwab, and Fidelity offer education savings account
  • Additionally, you can open these accounts directly at a financial institution

Mutual Funds

Another way to save for college is through a mutual fund. A mutual fund is a professionally managed investment vehicle with a goal of beating the return of the overall stock market. 

What to Like: 

  • You can contribute as much as you’d like per month/year to a mutual fund
  • There are countless mutual funds you can choose from, all with different investment objectives and investment options
  • The possibility to earn a high rate of return exists 
  • You can use the money in a mutual fund to pay for whatever you’d like, it doesn’t need to be used just for educational purposes

What Not to Like: 

  • A mutual fund is risky, you could lose the money you’ve invested 
  • Fund fees can quickly erode the profit you generate 
  • Capital gain tax is triggered when you sell your investment

Where to sign up:

  • You can buy a mutual fund directly through your online stock brokerage 
  • If you do not have a stock brokerage, you can work with a professional financial advisor who can present you with numerous mutual fund options 

U.S. Savings Bonds

A United States savings bond is any investment option you could use to save money for a later point in the future. This is a conserative approach that provides minimal risk. With that said, the opportunity for great upside potential does not exist. 

What to Like: 

  • United States saving bonds have tax advantages 
  • You can redeem a bond tax free if it is being used for an educational expense 
  • The bond is fully backed by the United States government, making it a safe investment

What Not to Like: 

  • These bonds do not offer a great rate of return
  • The opportunity cost of a bond must be taken into consideration

Where to sign up:

  • Purchasing U.S. saving bonds is easy! You can do so online in just a few moments. 

Roth IRA

A Roth IRA, or individual retirement account, is another great investment option you can have in your college savings plan. 

What to Like: 

  • A Roth IRA can not only be used as a college savings plan, it can also be used to fund your retirement.
  • There are numerous tax benefits of a Roth IRA
  • This investment vehicle is not counted as an asset when the student files their FAFSA paperwork 
  • The 10% withdrawal fee is waived if the money is bing used to fund educational expenses

What Not to Like: 

  • You are capped at contributing a certain amount of money to a Roth IRA per year 
  • Depending on your income level, you may not be able to set up a Roth IRA
  • The rate of return in a Roth IRA is typically lower than other investment options 

Where to sign up:

  • You can open a Roth IRA directly at your bank
  • If you’d like to open a Roth IRA within your online brokerage, you can do so 

How Much Should I Save For College? 

Now with a better understanding of the best ways to save for college, you may be wondering how much should I save for college? That is entirely dependent on your college goals, dreams, and ambitions.

Without question, a private university can cost a ton of money! However, there are ways to get a higher education without breaking the bank. Spending two years at a community college, and transferring to an instate public university, is one of the ways you can save a great deal of money on your educational expenses. 

6 Steps to Save for College

There are 6 steps you can follow to save money for college. 

Make a Budget and Set Goals

First things first, it starts with making a budget. Figure out how much money you need to live each month, and develop a savings plan.

You may have to cut back on spending. For example, perhaps dial back how often you go out to eat, or how much money you spend each month on clothes and/or accessories. 

Pick the Best Savings Account

Now that you know how much money you need to survive, it’s time to save the rest. Not only do you want to save this money, you want to save it in the best account possible.

As discussed above, there are numerous accounts/investment options available that can be used as a college fund. Make sure you’re selecting an investment option that is aligned with your goals and risk tolerance

Make Sure to Follow Through

Once you have a plan, be sure to execute! Similar to a diet or exercise plan, you need to follow through to see the results you’re looking for.

The only way to successfully save for college is to continuously follow the plan you’ve established. 

Apply for Scholarships

Another great way to reduce your college expenses is to apply for scholarships. You do not need to be an athlete to receive a scholarship and there are many variations of scholarships for different students and their needs.

Check all options before applying to the school. You may get a scholarship based on your academic accomplishments, or various life circumstances. 

Get a Job

In most states, you can pick up a part time job at 16 years old. If you need to save money for a college fund, getting a part time job while in your highschool years can help you and your family put away some money.

As a student, keep your expenses low! Any money you earn working part time can be used to fund your college savings plans.

Apply for Aid / Loans

Last but not least, you can apply for financial aid and loans to help cover the cost of higher education. Securing a loan, or receiving financial aid, is never guaranteed.

Therefore, this should be your last resort and used only if needed! 

Get on the Right Path Today! 

Whether you are a parent and you’re looking for the best way to save for your kids college expenses, or a highschool student quickly approaching graduation, the best way to save for college is to start as early as possible. When time is on your side, investment vehicles can help tremendously!

Working with a professional financial advisor is a great way to ensure you are taking the right steps to put your college education in financial reach! A financial advisor will take a survey of your current financial situation, and will help you find the best college savings plans that will help you reach your goals.

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