As the mother of a high school senior and college sophomore, I found the costs associated with higher education daunting. However, I also discovered that there are helpful strategies to make the process of saving for my children’s education more manageable.
With that in mind, here are four smart ways to save for a child’s future college expenses:
1. Pay yourself first. If you’re like most families, you’re wondering how to strike the right balance between saving for your retirement and your children’s education. Although parents commonly put their kids’ needs before their own, that’s definitely not a good idea when it comes to college savings. In fact, most financial experts say it’s vital to fund your retirement before you save money for the kids.
The reason: There are many ways to help pay for college, including a variety of financial aid and student loan options. But the same can’t be said for your retirement. (Good luck getting someone to give you a federally subsidized retirement loan!) Funding your golden years will depend largely on how much you save and invest today. That means your top priority should be maxing out your retirement accounts.
2. Start saving as early as possible. Once your retirement savings plan is on track, start saving for college expenses as soon as possible. With tuition costs expected to rise by about 6 percent a year on average, a newborn today might easily need more than $300,000 to attend an in-state public university for four years—and nearly twice that to attend a private school.
But before those numbers cause you to panic, just remember: The same strategies that will help you reach your retirement savings goals—start early, invest regularly and contribute as much as you can—will set you up for success as you save towards your children’s education.
3. Make the most of tax-advantaged college savings options. Your most powerful allies in the college savings game include tax-advantaged accounts that enable your savings to go farther than they would in more traditional accounts. For example:
• 529 plans allow parents, relatives and friends to invest for a child’s college education. The earnings and gains on those investments grow on a tax-deferred basis, which can help your money increase faster than it would otherwise. What’s more, you won’t owe any federal taxes on withdrawals from a 529 as long as you use the money to pay for tuition, books, room and board and other qualified educational expenses. These plans’ lifetime maximum contribution limits vary by state but generally range upward of $200,000 per beneficiary.
• Education Savings Accounts (ESAs)—also called Coverdells—offer tax-deferred growth and tax-free withdrawals to pay for qualified educational expenses, just like 529 plans. But ESAs come with features that 529s lack. Example: You can use ESAs for certain elementary or secondary school expenses as well as for college expenses. ESA contributions are capped at $2,000 annually.
• Custodial accounts are managed by a parent or guardian on behalf of a child. They offer various tax advantages based on the amount of earnings they generate, and there are no contribution limits or restrictions on how the money can be spent as long as it benefits the child. But be aware that unlike 529s and ESAs, money in a custodial account belongs irrevocably to the child. Translation: When your kid turns 18 (or older, depending on the state rules governing the account), he or she can use the money for anything—and yes, that includes a new car or trip to Europe.
4. Get help if you need it. Let’s face it: It’s challenging to juggle multiple savings goals. Working with a financial professional can help ensure that you strike the right balance between your various objectives, as well as make the most of all the college financing options available to you—including your existing assets, financial aid and scholarships, and loans or lines of credit. A plan that combines some or all of these resources can help you pay for college while also staying on track toward your other key life goals.
Maureen Parker is an Independent Branch Leader and Financial Advisor at the Charles Schwab branch in Saratoga Springs, New York. She has 22 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC. (0619-9H7E)