Start by reviewing your full financial picture, estimating future college costs and saving consistently in a plan that fits your goals. Families may consider a variety of education savings options depending on their financial circumstances, goals and priorities.
Learning Center / Financial Planning / How to Save Enough Money for Your Child's College Education
How can parents start saving for college?
By Donna Walton, Wealth Strategist at TD Wealth
Key takeaways
- Review your full financial picture, including retirement savings and current obligations.
- Estimate future college costs across public, private, in-state, out-of-state and community college options.
- Start saving early so regular contributions have more time to grow through compounding.
- Learn about education savings options, such as 529 plans, custodial accounts, Coverdell ESAs and prepaid tuition plans, to determine which may align with your circumstances and goals.
- Explore other options, such as custodial accounts, Coverdell ESAs and prepaid tuition plans.
College costs continue to rise, including tuition, room and board, making early planning increasingly important for families. Donna Walton, Wealth Strategist at TD Wealth®, shares practical steps parents can take to start saving.
Why should you review your full financial plan?
Financial planning for education can start even before a child is born. Before committing to college savings, make sure your broader financial plan is on track. That includes prioritizing retirement savings and managing existing financial obligations. Like the airplane oxygen mask rule, prioritize your own financial stability before taking on education savings.
Make sure your retirement savings, and any financial obligations, are on track. You can't take loans to support your retirement, but you can request tuition and room and board assistance from colleges and universities, take student loans and apply for independent grants and scholarships to help pay for college.
How can I estimate future college costs?
Talk to a college advisor about the comparative costs of public versus private institutions and use a college tuition calculator to give you an estimate of future tuition and room and board costs. Consider, for example, the cost differences between an in-state public university versus a private college or university. Also consider if your child can attend a local community college for two years and then transfer to a larger university.
Finally, take into consideration your child's qualifications and eligibility for financial support from colleges and universities (many are now need-blind) and the options available to help achieve your education funding goals.
Consider working with qualified financial, legal and tax professionals to better understand the education savings options that may be available and how they fit within your overall financial plan.
Why do I need to start saving early for college?
Small amounts add up over time, and it’s never too soon to start. The earlier you set aside money, the more you can take advantage of the power of compounding. To the best of your ability, stay consistent. Sometimes life gets in the way, but regularly revisiting your financial plan for education can help you stay on track. If possible, set up recurring transfers from your checking or savings account to a college savings account so it’s one less thing to think about.
What is a 529 Plan?
One education savings option families may consider is a 529 education savings plan. Whether a 529 plan is appropriate depends on a family's individual goals, financial circumstances and state-specific considerations. 529 plans allow you to put after‐tax money into an investment account on behalf of a designated beneficiary, usually a child or grandchild (though it could be a niece, nephew or even a non‐family member). Depending on the plan and applicable rules, withdrawals may be tax free when used for qualified education expenses. Funds may also be used for graduate school and, under certain circumstances, the beneficiary may be changed to another eligible family member.
You can open a 529 account before a child is born and update the beneficiary later. Then, once the baby is born and gets their own social security number, the parent can make the child the beneficiary. 529 plans allow the account owner to change the beneficiary to a family member, which in this case would be the newborn child.
Since 529 plans are state sponsored, every state has a different plan with varying investment options. You must choose the investment options offered by the 529 plan and you can only reallocate investments twice a year.
Contributions to a 529 plan are not federally tax deductible but contributions may be tax deductible in some states (other states may offer a tax credit). And remember that you don’t have to live in a state to take advantage of their 529 plan.
What are other ways to save for college?
In addition to 529 plans, there are several other education savings options available. With a custodial account, also called a Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA), contributions can be used for more than just education. But assets must be transferred to the child when the child reaches a certain age dictated by the state - a potential downside if you’re concerned your child may not be responsible enough to manage the account.
Coverdell Education Savings Accounts (ESAs) are tax-advantaged vehicles that work similarly to 529 plans because distributions for qualified education expenses are tax free. However, contributions are limited to $2,000 per year (an amount that may be reduced further based on income).
A Prepaid Tuition Plan is a type of 529 plan usually only offered to state residents where money is set aside for one specific college at today's rates. Amounts can be shifted to another university but may be subject to penalties.
How can family members help with college savings?
When a family member asks what your child needs for an upcoming birthday or celebration, such as a Sweet 16 or Bar or Bat Mitzvah, direct them to contribute to your college savings plan. Do the same if you get an unexpected windfall from a generous or deceased relative.
A wealthier family member can set up an irrevocable trust for your child. Assets that may be taxable but will be overseen by a trustee to make sure the funds support a college education. Any money left over after college can go to that child later down the road.
What federal resources can help with college costs?
Even after years of saving, you may still benefit from additional help. The federal government sometimes offers income-based, or scholarship-based, financial support. There may be college specific resources at the financial aid office. Also, many local groups and organizations often have small scholarships. Visit the vast number of online scholarship and grant resources and websites available as your child gets closer to college age so both you, and your child, get that last financial push over the finish line.
FAQs
Families should start by looking at their full financial picture, including retirement savings, current obligations and long-term goals. From there, they can estimate future college costs and choose a savings strategy that fits their budget.
Saving for education is important, but parents should make sure their own financial needs are on track first. Retirement savings, debt and other obligations should be considered before deciding how much to set aside for college.
Parents can compare the costs of public, private, in-state, out-of-state and community college options. A college tuition calculator and guidance from qualified financial advisor can also help families plan for future tuition, room and board.
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