One question I have had a lot of readers ask me about is how to save for college. There is just so much information out there and it can really be overwhelming. The following is a guest post from Long Pham. He helps break this down to help you know where to start when it comes to saving for your child’s college eductation.
How To Save For College
As a parent, I know that everyone has different values and definitions of the American dream. As different as we all are, I believe that we all share one thing in common. We all want our kids to get a great education and have better opportunities than we had.
As expensive as it is to raise children, one of the biggest costs we will face is the price of a college education. Between working, paying day to day bills, and saving for our own retirements, it can be a stretch to save enough money to pay for four years of college.
Luckily, with scholarships, grants, and student loans, we don’t have to pay for it all. The reality is that we’re going to have to pony up some money to help our children get through school. Here are four options on how to do it.
529 College Savings Plan
529 plans are tax-advantaged accounts that you can use to invest your money for the purpose of paying for higher education. This means that withdrawals from the account to pay for college or vocational school expenses are tax-free. Some states even have tax-deductions for account owners who participate in the plan located in the state they reside in.
There are two types of 529 plans:
- Pre-Paid College Tuition – You would use this type of account if you know your child will be attending a particular university. There are only a limited number of states that offer this type of program. This option limits which schools your child can attend.
- Savings – This is the most popular option for college savings. With a savings plan, you can choose to participate in various types of investment options. There are no income restrictions that limit participation and you can even change beneficiaries if your child doesn’t use up all the funds.
Coverdell Education Savings Account
Recent changes in the law have made the Coverdell ESA, a tax-advantaged investment account for education, permanently available. You can contribute $2,000 per year, per child, and can hold almost any type of investment. The important difference from a 529 plan is that you can also use the money from a Coverdell ESA to cover K-12 education expenses.
If you own, or want to buy whole life insurance, you can use a loan on the cash value to pay for college. Most finance experts will not recommend this option and will steer you away from this type of life insurance. Besides paying for a salesman’s commission, the returns are low.
Still, it is an option for conservative parents. The upside of using life insurance to pay for college is that it is not calculated in financial aid formulas, giving your child a better chance of obtaining grants or subsidized government loans. Just keep in mind that any cash you take out of your policy will reduce the death benefit until you pay back the loan.
If you’re very conservative, you can save money for college in a good old savings account. Your money will be very safe in the bank (up to the limits of FDIC insurance), but won’t get you very much in terms of a return. In fact, with the low interest rates common today, you’ll most likely be losing money due to inflation.
If you don’t know where to start, a financial advisor can help you figure out the best approach. Remember that scholarships and financial aid are available to everyone. Read: you don’t have to pay for everything. Your kids will learn valuable lessons in budgeting and living within their means by being responsible for a large part of their expenses in college.
Long Pham started his blog Budget for Wealth to help readers just like you navigate the world of personal finance. He helps dispel the myths of money management and helps you learn how, with a little discipline and knowledge, how anyone can become financially secure.