Does the thought of paying for your child's college education ever keep you up at night? When it comes to higher education, the more you can prepare for it, the better. With nearly 45 million Americans dealing with crippling student debt, the need to invest for higher education becomes even more of a priority.
The most common choice people make when investing for higher education is putting money into a savings account for their child. However, interest rates are far from what they used to be!
Saving a set amount of money each year allows parents to know how much they have for their child to go to college and how much more they need to contribute so their child can get their education debt-free. With a solid savings plan, a great savings account, and some research, it’s entirely possible for families with an average income to pay for their child’s education.
The key to choosing a good savings account is to choose one that is stable and has reasonable interest rates. You can select from college-targeted savings plans as well as others intended for more general purposes.
Many parents choose to use a 529 college investment plan. In certain states, there are tax benefits to investing in a 529 plan. Each state has its own 529 plan, but you can invest in any of them. They each have different investment options with a goal of maximizing the return on the college savings you're investing. While these are post-tax plans, the money grows tax-free and can be withdrawn for any qualified education expense without tax penalties.
Choosing a traditional investment savings plan to use for higher education investment can help you save money with certain tax benefits. Choosing to use a Roth IRA is a great way to save money and get attractive tax benefits.
These plans, while great for savings, are not ideal for every college situation. They are best used for supplements to other college savings plans since there are caps on the amount you can put in each year.
Similar to a 529 plan, many states have savings plans where you can begin paying for college tuition far in advance. Most states require you to pay for tuition to in-state schools only while others may have residency requirements in addition to the in-state school requirements.
Prepaying for tuition can help you guard against tuition hikes in the future and can lock in a rate for your child. Prepaying for tuition may be a great investment if you start early enough that the tuition price will be far less than it would when your child starts attending college. For example, someone who prepays for their tuition when their child is five will see a much bigger return than someone who prepays for tuition when the child is 15.
Perhaps the most significant caveat in this type of investing is your child is limited to a specific school or certain group of schools. Since it can be challenging to know what your child’s schooling is going to look like in the future, there may be some uncertainty when it comes to choosing this type of higher education investment.
Open a Gift Account
When you open a gift account, you could qualify for tax breaks. These breaks are not only helpful when you’re trying to compare the benefits of each of the investing options, but they can also be beneficial for investing even more money. When you qualify for tax breaks because of a gift account, you may be free up more assets to put back into higher education.
Perhaps the easiest and safest investments you can make toward your child’s education are treasury bonds. They are backed by the federal government, which makes them an ideal solution for anyone who wants to see a modest return but doesn’t want to deal with any risk.
While treasury bonds are a great way to put money away for your child and, essentially, store it in a safe place where it may accrue value, they are certainly not an investment that could grow to pay for an entire four-year college career.
Setting aside money in bonds is a great way to diversify your future college investment portfolio, but it is not the only type of investment you should rely on. Investing in some treasury bonds is a great way for your child to have some extra spending money, board money, or food money they can use each semester.
Consider a Trust Fund
If your visions of trust fund families involve sprawling New England mansions and a grandmother who talks with a leftover transatlantic asset, you’re not alone. Many people consider trust funds to be for the upper echelon. What you may not realize is anyone can open a trust account. Educational trust accounts are becoming increasingly common as parents wish to contribute more to the rising costs of education. There is also a tremendous amount of flexibility when it comes to selecting investments to fund the account.
As with any big financial goal, the best thing you can do is start saving immediately and save consistency. An automatic deposit into whatever savings vehicle you choose will go a long way in helping you reach your goal.
Do you want to talk to other moms about how they're planning for their child's college education? Join us in the Moms Managing Money Facebook Group.
For more resources on this topic and many others, check out the Moms Managing Money resource library.
Learn 6 things you can do today for your financial future. Access it now.