Smart Ways to Save For College

Written by Credit Union of Texas
Published February 11, 2019
how to save for college how to save for college

To your kids, it's a chance to live a life of freedom and determine what they want to do with their life. To you, it’s a monumental expense that’s coming up way too quickly. It’s college and if the costs of paying for your children’s higher education border on terrifying, you’re not alone.

Fortunately, it’s never too early — or too late — to start saving for your children’s college education and today we’re going to look at the best strategies you can use to cram for those expense needs, no matter the age of your children.

Understanding the costs of college

So how much will it take? That’s really the question on everyone’s mind, and Bigfuture.collegeboard.org has a handy calculator that can help you gain at least a rough understanding of your necessary expenses.

Here’s an example.

Let’s say your child will attend an in-state public school once they graduate and they're five years away from attending college. The plan is for them to attend this school for four years and you hope to be able to pay 35 percent of their tuition expense from savings.

In this example their total college tuition cost would be $117,979, accounting for 5 percent inflation. Your savings goal to meet that 35 percent benchmark would be $41,292.

Keep in mind these costs account solely for tuition, and that room and board and other living expenses will add significantly to the overall costs.

Savings solutions

Grants, scholarships and education-related tax breaks can all help reduce your college expenses but saving for such a goal still requires an aggressive strategy. To support your children in paying for college, here are some saving solutions you can consider.

529 plans

Let’s start here because 529 plans are specifically tailored to help you save for college. The market is flush with 529 options, and each carries its own operating costs and annual fees.

In most cases investing in a 529 plan will offer you considerable tax advantages, such as no federal taxes, for example. While every state has its own 529 plan, you may find some are significantly better than your own in-state option. Savingforcollege.com can be an invaluable resource to help you start your search for a 529 if you choose to pursue such a plan.

Prepaid plans

Our example above was for a student planning to attend school in-state. That makes them a perfect candidate for a state prepaid tuition plan. Such plans allow you to lock in your tuition prices years ahead of enrollment while providing the same tax benefits as a 529 plan. Prepaid plans are not available in every state so research your eligibility first. If your state does offer such a plan and your student is committed to attending such a school, this strategy is a must.
So if you have a child interested in attending a private school, there are nearly 300 schools that take part in the Private College 529 Plan.

Roth IRAs

Consider this a long-term play. Why? Because to fully use the power of your Roth IRA, you must be fully funded for retirement. Pulling money from the IRA before that will leave you without the opportunity to make that money back.
However, if you start aggressively funding your Roth IRA long before you need the funds, it can be a valuable tool to help you pay for college and support your retirement.

You can contribute $6,000 to your Roth IRA annually and $7,000 if you’re over 50. Your money in this account will grow tax-free, and you can avoid the 10 percent withdrawal penalty if you are withdrawing the money for education expenses. Start funding your IRA early and you’ll have a solution capable of supporting all your goals.

UTMA or UGMA accounts

Short for Uniform Transfer to Minors Act and Uniform Gift to Minors Act, these accounts serve as a type of trust for your would-be college student, allowing you to include bonds, stocks and even cash in these accounts.

While revenue from several different places can be added here, you should know the colleges will review this account when determining your appropriate amount of financial aid. This means the more you build up the resources in this account, the more it could jeopardize your child’s financial aid receipt.

Coverdell Education Savings Account

This option operates similarly to a UTMA or UGMA account. However, you can never contribute more than $2,000 per year to the account. Also, this amount is determined by the recipient, so opening multiple accounts all assigned to your child will not increase the amount that can be contributed. This restriction makes the Coverdell solution a secondary option at best, but it may be worth considering if you are maxing out contributions to other options — like a 529.

One to avoid

As you can see above, there are several options that you can use to support your children’s college education, but before we go, we wanted to close with one option you should avoid — cashing out your life insurance policy.

While sales pitches may attempt to convince you such a move is a sound practice, cashing out your life insurance policy carries considerable charges, which can take as long as a decade of contributions to repay. If you withdraw your policy in the first seven to 10 years, you could face additional charges known as surrender charges.

The market is flush with better options that can help you grow your financial power instead of simply subtracting from it.

Finding the support you need

If you have questions about your college financing solutions, the Credit Union of Texas is here to help. Contact us today or stop in to say hi and we can help you review all your options.