Today’s college students can expect to pay anywhere between $4,000 and $40,000 or more per year to attend college. And that number often doesn’t include room and board and other college expenses.
If pondering those numbers gets you thinking you’d better start saving, you’re on the right track. But what options are there for saving for college, and which way is best?
When it comes to saving for college, you’ve got several choices. Here’s a break down the stipulations of each college savings vehicle and let you decide which choice is best for you or your college-bound child.
Table of Contents
1. 529 Plan
The 529 Plan is the oft-touted “darling” of all college savings options. And proponents of the 529 are right: there’s a lot of good things about saving for college with a 529 plan.
Earnings from a 529 plan grow tax-free. In addition, you’re not taxed on those earnings when you withdraw the money – provided the funds are used to pay for college expenses.
You can deposit money into a 529 plan for yourself or your child regardless of your income level. However, there are some limits on how much you can contribute to a 529 plan annually.
And you can open a 529 plan in any state, regardless of which state you live in and which state the student will attend college in. This is a great benefit since every state has different 529 plans, benefits, and rules. But keep in mind that your contributions will not be eligible for state income tax deduction if you use a plan outside your home state.
Another great thing about the 529 plan is that anyone can contribute to it on the beneficiary’s behalf. That means your child’s grandparents, aunts, uncles, siblings, or even friends can contribute to their 529 account.
And you can change beneficiaries from one child to another on a 529 plan if the original beneficiary decides not to attend college or doesn’t use all of the plan’s funds. However, check the details on the plan regarding transfers as some restrictions may apply.
Also, there are no age limits for using the funds for college.
One major drawback of the 529 plan is that the funds are considered when colleges determine the amount of financial aid a student is eligible for. That means having a plush 529 balance could hinder your student from receiving financial aid.
Visit the Savingforcollege.com website to get state-by-state information on the different 529 plans.
2. Coverdell Education Savings Account (ESA)
Coverdell Education accounts allow you to save $2,000 after-tax money per child for college. Contributions must be made before the child turns 18.
Anyone can contribute to a Coverdell account as long as the total contributions for the child don’t exceed $2,000 annually. The money grows tax free and distributions are tax free as long as they are used for education purposes.
However, all funds must be used by age 30 or tax penalties could apply. If the funds can’t or won’t be used by age 30, you do have options to roll them over to another beneficiary.
Also, there are income limits for contributing to a Coverdell account. As of 2020, the income limits to contribute to a Coverdell account were $110,000 for single filers and $220,000 for joint filers.
The financial aid impact of a Coverdell account depends on the ownership and tax dependency status of the student. Anyone can open a Coverdell account for a college-bound student.
3. Roth IRA
You might not think of a Roth IRA when determining the best ways to save for college. However, using a Roth IRA as a college savings vehicle has one colossal benefit: If you don’t end up using the money for college, no harm, no foul.
You simply keep it in the account and save it for retirement.
As with 529 Plan and Coverdell contributions, the money designated for your Roth IRA isn’t tax deductible. And the earnings grow tax free and distributions are tax free as well.
And according to Roth IRA rules, you can withdraw funds early – and without penalty – when you’re using them to pay for qualified college expenses, either yours or your child’s.
In addition, Roth IRA funds aren’t taken into consideration on your child’s FAFSA application. However, distributions from the Roth IRA are, which means you’ve got to carefully time your withdrawals when using the money to pay for college.
This makes the Roth IRA an almost-perfect college savings vehicle. There are downsides to using a Roth IRA as a college savings vehicle:
- There are income limits for Roth IRA owners
- Unlike a 529 plan, other family and friends can’t contribute directly to your Roth IRA
- The owner of a Roth IRA must have earned income
So, if you’re planning on contributing to your child’s college expenses, you can do so from your own Roth IRA. Or if your child has regular earned income, they can contribute to their own Roth IRA.
4. Custodial Account (UTMA/UGMA)
Another way to save for college is to save money in a custodial account.
With custodial accounts, the custodian has control over the money until the child reaches legal age (18 or 21 depending on the account and the state). After that, the money belongs to the beneficiary.
Anyone can contribute to a custodial account for a child and there are no income or contribution limits. However, it’s important to note that custodial account assets will impact the student’s financial aid package.
Custodial accounts come in two flavors: a savings account or an investment account.
If you still have several years until college consider the investment account to take advantage of potential growth from the stock market. While custodial savings accounts do involve less risk of loss, the interest they earn these days is dismal.
UNest is an SEC registered investment advisor that helps you invest funds inside of an UTMA account.
As the custodian, you determine whether the funds are invested in mutual funds, bonds, ETFs or other investment choices.
The cool thing about UNest is that they offer an app where you can set automatic contributions to your account. This makes saving for college really easy.
In addition, you can invite your family members and friends to contribute to the child’s UTMA account via the app as well.
UNest will charge you $3 per month for this service until your child’s account reaches $50,000. After that you’ll pay a 0.25% annual fee.
5. Qualified Savings Bonds
Your traditional EE savings bonds can be used to pay for college as well. When used for qualifying educational expenses, you can exclude the interest earned from your savings bonds from your gross annual income.
However, as with custodial savings accounts, the current interest rate on savings bonds is minimal.
Other College Savings Tips
These additional options for saving money for college can be just as helpful as the five mentioned above. Are there any you can take advantage of?
Apply for Scholarships
According to Scholarships.com, there are nearly four million college scholarships available at any time. And the kicker is that many of them go unused simply because students and their parents aren’t aware they exist.
That means there are millions of dollars out there that companies and individuals are waiting to give away for college use.
When you visit Scholarships.com, you can find scholarships that are awarded based on a variety of factors such as:
- Athletic ability
- Artistic ability
- Gender or race
- Varying special attributes (such as being tall)
Scholarships are the best way to pay for college. Don’t leave this gold mine of college money untapped. Check out our review of Scholarship Owl, a service that matches you with scholarships you may be eligible for. And here are some other ways to get scholarships.
Take AP/Dual Enrollment/PSEO Classes
Depending on which state you live in, you could be eligible to take free college classes while in high school. Many high schools have an AP (advanced placement) program directly within their high schools.
AP classes allow students to earn a college credit while taking their high school class. Dual Enrollment and PSEO (Post Secondary Enrollment Option) classes are similar programs.
PSEO and Dual Enrollment classes are typically offered at a local college (though sometimes offered at high schools), and students earn the same credits they would if they had graduated from high school and were enrolled.
Credits count both toward college and on the high school transcript, and are paid for by the state. Talk with your high school guidance counselor about these options.
Taking college credits while in high school isn’t for everyone. Check out this article to learn more about dual-credit classes.
Work and Save Your Money
And there’s always the option to save for college the old-fashioned way: Go to work and save your money. College and its associated costs are expensive.
There are dozens of ways to save money while in college, and you’ll want to take advantage of as many of those options as you can. However, starting with a plush savings vehicle to begin with will definitely help.
You can ramp up the amount of money you’re putting in the bank each month a number of ways. You can get a traditional job at a store, restaurant, or other business.
Or you can pick up a side hustle (or three) to earn extra cash in a way that fits in with your schedule.
Once you start working, be sure to save your money in one of the best bank accounts for college students too. Doing so will help ensure you’re earning the most money on your savings and paying the lowest amount in banking fees.
I promise your efforts will be worth it when you can help avoid graduating with student loan debt.
There are many great ways to save for college. The important part is that you do, in fact, save. The less student loan debt you graduate with, the more money you’ll have to save, invest, and achieve your financial goals.
Are you a high school student, college student, college graduate, or parent of a college or college-bound student? What have you found are the best ways to save for college?