Building the Future: A Guide to Children Education Savings Plan
According to the Education Data Initiative, the average cost of college in the U.S. today is roughly $35,551 per year or $142,000 over four years— that’s not pocket change.
As a result of skyrocketing college tuition and fees, the U.S. is experiencing a student debt crisis, which is harming college graduates as well as the national economy.
What can we do about it?
One way to avoid massive loan debt while still obtaining an advanced degree is to utilize funds from an education savings plan. Parents who open these incentivized plans for their children are taking the first steps toward ensuring a brighter future for all.
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Types of Children’s Education Savings Plans
Some years ago, I looked into starting a 529 plan for my kid because I’d heard the term often. I had no idea that there were a number of other education savings options out there — in fact, there are at least five general categories of education savings plans to choose from if not more! Here’s a little bit about each:
- These are not subject to state or federal taxes.
- Individuals can contribute up to $15,000 each year.
- Work with your financial institution to make more conservative or risky investments based on your child’s age and other factors.
- All funds must be used for eligible education expenses.
Coverdell Education Savings Account
- These are also tax-free (just like 529s).
- Coverdells have a lower annual contribution limit (typically $2,000/year)
- This option was more popular before K-12 private school tuition became eligible under updated 529 plans.
Custodial Accounts (such as UGMA and UTMA)
- These accounts are taxed to children rather than adults, which is lower (but not tax-free).
- Individuals can contribute up to $15,000/year, while couples may contribute up to $30,000/year.
- Control transfers to children once they turn either 18 or 21 (state dependent).
- Funds can then be used for any expenses, not just qualified education expenses.
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Prepaid Tuition Plans
- This is actually a specific type of 529 account.
- Prepaid plans lock in the current tuition rates to avoid inflation or other changes over time.
- Typically, the learner is limited to in-state colleges and universities.
- Funds do not cover non-tuition expenses, such as room and board.
Traditional Savings Accounts
- These accounts are familiar and straightforward.
- Your teen can also easily contribute to the account if they have a job and income.
- Though simpler, regular savings accounts earn less interest compared to 529 plans.
Some would include privately purchased savings bonds and stock market investments in the list, too. Although not bank account types per se, they are certainly options you can utilize to grow your investments and save more for higher education.
Benefits of Children Education Savings Plans
An education savings plan should provide a benefit to your family. Each type of account comes with its own pros and cons, and comparing these features (outlined in the list above) can help you find the biggest payoff for you and your unique situation.
Some plans offer flexibility, others lock your child into pursuing college (which might be a pro or a con depending on your perspective), some offer less control over investments, others offer tax breaks, and some are easily accessible at your local bank.
Overall, an education savings plan will help your learner avoid debt later in life. Specific advantages depend on the account type, and each family should make the decision that best suits their own needs.
So how can you choose?
How to Choose a Children Education Savings Plan
One key decision-making factor is your level of certainty that your child will pursue higher education, as some plans are limited in the types of expenses they can be used for. If you have a 529 or Coverdell ESA, for example, and your child enters the job market directly after high school, you can still withdraw funds but with a 10% penalty. Prepaid tuition plans are similar, but funds can also be transferred to another child in the family.
Other potential drawbacks to a 529 plan include somewhat limited personal choice in investments, as well as a potential impact on financial aid offers.
Flexible options like custodial accounts, Roth IRAs, and traditional savings accounts may be a better fit if you consider an early career path before college for your child.
- The best way to find the ideal plan for you is to discuss options with your trusted local bank or seek out a financial advisor.
- If you’re sure about saving for college, you might review Forbes’ list of the best 529 accounts of the year.
- For more tips, check out this list of suggested reading from American College Funding.
Tips for Maximizing Children’s Education Savings
As 529 plans are among the most popular and well-known savings options, you can find a number of tips, hacks, and other recommendations specific to 529 plans just by googling. But what if that isn’t the right plan for you?
Consider a few general savings tips that should apply across the board:
- Start investing or saving as early as you can to maximize payout;
- Set clear, specific, and realistic savings goals;
- Make your contributions automatic;
- Increase contributions over time; or
- Make an extra payment at least once per year.
The education-saving process is also a wonderfully relevant learning opportunity for your children. Involve them in the process and talk to them about saving, interest, and costs. Understanding the financial responsibility that comes with higher education, loans, scholarships, and specialized savings plans will work to their advantage as they begin to manage their own finances and make important life choices.
Be sure to include them in the goal-setting process, and do a monthly or yearly accountability audit together.
Wrapping Up Children’s Education Savings Plan
In today’s global society and economy, financial know-how pays off long term. Making smart plans and investments as your children grow up will serve them throughout their futures.
Take a minute to reflect on these fast facts from the Education Data Initiative:
- The student loan debt growth rate outpaces rising tuition costs by 353.8%.
- By July 2020, 11.2% of adults with student loan debt reported they could not make at least one student loan payment that year-to-date.
- 15.1% of student borrowers under 40 years old are behind on their student loan payments.
- 20 years after entering school, half of student borrowers still owe $20,000 each on outstanding loan balances.
Saving for and with your children will help them begin their post-secondary life on the right foot, and the financial lessons will continue to support them as they grow and thrive.