Ways to Save for Your Child’s College Education
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Many parents share the same goal when raising children: to help their children grow into responsible, caring adults who can have the best life possible. One key component in achieving that goal is providing the opportunity to attend and graduate from college. However, given the rising costs of a college education, that is no small feat.
In fact, according to U.S. News & World Report, the average cost of college tuition and fees at a ranked in-state public college is $10,662 for the 2023-2024 academic year. If your child attends an out-of-state public college, the price increases to $23,630. Send your child to a private college; college costs escalate to $42,162. That’s why it’s important to start saving early for your child’s college education. Thankfully, there are several options to help you build up your child’s college savings.
Related: Ways to Save for College
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Ways to Save for Your Child's College Education
With so many saving vehicles available, saving money to pay for your kid’s college expenses is easier than ever.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
529 college savings plans
This tax-free savings plan offers one of the best avenues for college savings. You deposit money into the account, which is then invested in mutual funds. All monies in the account grow tax-free and can be spent tax-free for qualifying expenses, including tuition, books, and fees. You, relatives, and friends can all contribute to the account.
A state must sponsor every 529 college savings plan, although you don’t have to choose a plan sponsored by your state. You can review each 529 plan, choose the one you like, and set it up to start investing quickly. When shopping for a 529 plan, look for one with the least fees. Ideally, you want a plan with fees less than 0.20% annually. Also, when reviewing your state’s plans, look at ones that offer state tax benefits and/or lower expenses for residents.
Once you choose a 529 plan, set up the account in your name with your child listed as the beneficiary. Also, select “age-based portfolio” for the investment option, which means the plan manager will adjust the plan’s risk level as your child grows up. Essentially, as your child gets ready to graduate high school, the plan is at its most conservative to preserve your investment.
In the event your child receives scholarships and grants to help pay for their college costs, there are options for you to use your 529 funds in other ways. You can transfer the account to another child, who can use the money tax-free for college expenses. If your child gets a full college scholarship and won’t need any 529 funds, you can use that money yourself, but you’ll have to pay tax on the earnings. If your child elects to skip college, you can withdraw the money for your use, although you’ll have to pay tax on the earnings plus a 10% penalty.
Coverdell education savings account
A Coverdell education savings account (Coverdell ESA) is a trust or custodial savings account wherein all funds are used to pay for qualified higher education expenses and elementary and secondary education expenses for a named beneficiary. To qualify as a Coverdell ESA, it must meet three specific requirements:
- At the time you set up the account, the beneficiary must be younger than 18 years old or be a special needs beneficiary
- It must be designated as a Coverdell ESA at the time you set it up
- All documentation for setting up and governing the account must be in writing
With a Coverdell ESA, all contributions to the account must be in cash and not deductible. While you can set up multiple Coverdell ESA for each beneficiary, the maximum contribution to all accounts is $2,000 annually. When withdrawing funds, they are tax-free as long as the amount does not exceed the beneficiary’s qualified education expenses. If you withdraw more than is needed, you must pay tax on a portion of the earnings. All monies must be withdrawn by the time the beneficiary turns 30 unless they are a special needs beneficiary.
Mutual funds
A collection of stocks, bonds, or other investments, mutual funds are a good option to build college savings because there are no contribution limits, and you can use the earnings however you want. However, this type of investment comes with some risk, so it’s a good idea to research them carefully and/or talk with a financial advisor to help you find the right investment account to meet your financial goals.
Roth IRA
Widely known as a retirement savings account, a Roth IRA also can be used to pay college expenses. Earnings in a ROTH IRA grow tax-deferred and, if used for qualified higher education expenses, are exempt from withdrawal penalties, provided the withdrawals meet certain requirements. One drawback of a Roth IRA is you won’t receive any tax deductions on your income tax, and, unlike a 529 plan, only you can make contributions. On the other hand, if your child doesn’t use any or all of the funds for college, you can use the money for your retirement savings.
Custodial savings account
With a custodial savings account, you can save money for your kids’ college tuition. Established under the Universal Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), you can set up an account in the name of your child, and you will retain control until your child reaches the age of majority according to your state.
If your child has a UGMA or UTMA account, it must be reported when they apply for financial aid, which could reduce how much assistance they receive. Contributions are limited to $15,000 annually, and some earnings are taxable.
High-yield savings account
High-yield savings accounts are similar to traditional ones, but they generally earn a higher interest rate, which could boost your savings. Benefits include:
- You can access the money whenever you want
- There are no limits on contributions
- You can use the money for anything you want
However, your money won’t grow as aggressively as it would in some of the other options mentioned above. Therefore, it could complement your other college savings plans, but it should not be your only savings plan.
Eligible savings bonds
One of the safest, low-risk investments available, savings bonds can provide another option for college savings. When you cash them in, any earnings are tax-free, provided they are used to pay for qualified higher education expenses, excluding room and board. However, these savings bonds have a low rate of return, with individual Series EE savings bonds earning an annual fixed rate of 0.10%, according to the U.S. Department of the Treasury.
Permanent life insurance policy
A conventional life insurance policy, a permanent life insurance policy applies a portion of the insurance premium toward the death benefit, and a portion is placed in a tax-deferred savings account. The savings account can be accessed at any time, so you can use it to cover the cost of college.
However, when purchasing and maintaining a permanent life insurance policy, fees could negate the benefits of using this option as a college fund. Therefore, you should consult a financial advisor to discuss the pros and cons to see if this could be a good choice.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
Other options for paying for your child’s college education
In addition to the above-mentioned college savings plans and options, there are other ways to pay for your kid’s college expenses.
Apply for financial aid
Every school and college has a financial aid office to help students get the money they need to pay for college. There is a variety of financial aid options available to you.
Loans
You can apply for loans from several sources, including financial institutions and the federal government, through the financial aid office. Federal student loans are offered through the William D. Ford Federal Direct Loan Program, wherein the U.S. Department of Education acts as your lender. Reviewing the terms and conditions of all loan offers before accepting one to ensure you get the right student loan for your needs is important.
Grants
Grants are monies that don’t have to be repaid unless you fail to comply with the grant’s requirements. Federal grants include Pell Grants, Federal Supplemental Educational Opportunity Grants, Teacher Education Assistance for College and Higher Education Grants, and Iraq and Afghanistan Service Grants. You also may be able to apply for grants through your specific state.
Scholarships
Scholarships are offered through nonprofit and private organizations and many corporations to help pay for college. Qualifying for this free money is based on many factors, including academics, a specific area of study, or talent. The financial aid office at the college may be able to recommend some scholarships, but you should also check with the members of your community, your employer, and online.
Work-study jobs
Through the Federal Work-Study Program, you can work part-time while in school to earn money to pay your college expenses. The program encourages employment in work related to your course of study and/or civic education. Not all schools participate in the program, so check with the financial aid office to see if your school qualifies.
Get a home equity loan
If you have a good amount of equity in your home, you may be able to use some of it to pay your kids’ college tuition. Depending on how much your child needs to pay for college, you may need quite a lot of equity. Generally speaking, most lenders will provide up to 85% of your equity. Of course, you’ll also have to pay fees and closing costs associated with the loan and interest over the loan term. One benefit is your interest payments may be tax-deductible.
Get a personal loan
Personal loans could help tremendously when it comes to paying for college. However, getting a loan for the entire amount needed to cover tuition may be difficult, so you may need more than one personal loan. As a result, you may not qualify for more than one or two personal loans if you have other outstanding personal loans. Plus, the interest rates and fees may be more than you would incur with a student loan.
FAQs
Saving to pay for your child’s college expenses can be challenging and confusing. Here are some common questions many parents ask about saving for college expenses.
Do all college savings plans have tax benefits?
While many college savings plans offer tax benefits, not every savings option provides tax benefits. Some are at the federal level, while others are only at the state level. It’s important to review the terms and conditions of each savings vehicle to find out what, if any, tax benefits you may receive.
Will my college savings plans affect my child’s application for financial aid?
Some savings plans and accounts do affect how much financial aid your child can qualify to receive. Talk with the school’s financial aid office to determine which plans and accounts affect a financial aid application and by how much. You also can talk with a financial advisor to learn more.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
The bottom line
Paying for your child’s college education will require a good amount of savings, so getting started early is important. Savings options range from 529 plans and Coverdell ESAs to Roth IRAs, mutual funds, high-yield savings accounts, custodial accounts, savings bonds, and permanent life insurance policies. You also can pay for college through student loans, scholarships and grants, work-study programs, and home equity or personal loans.
Deciding which savings vehicle is best for you depends on your financial standing and needs. Therefore, research each option to see which offers the best avenue to meet your financial goals. If necessary, talk with a financial advisor for additional insight and guidance.
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Writer
Karon Warren is a freelance writer who has covered articles in finance, insurance and health for sites like Reviews.com, USA Today, Healthgrades, among others.
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