If you’re like a lot of parents, you probably dream of the day you’ll be able to help your children with their college costs. Most of us know the pain of graduating college with thousands of student loan debt to our name. We hope and dream that we can do something about it so our kids will have a debt-free start after college. However, most of us don’t even know where to begin when starting a college fund for our children. It feels overwhelming and too far-fetched of an idea. But it’s possible! Even if your child is just a baby right now, you can start putting a fund for your child’s future tuition and college living expenses. All you need is a plan and several tools to help you along the way.
How To Start a College Fund for Your Child
The first thing to understand is the perfect time to start saving — and that time is now. Today. Don’t put off planning any longer. The sooner you start, the more you’ll be able to do for your child!
There are many tools available for parents to get started with the planning process. For instance, Bankrate offers a college planning calculator here. You can input a few factors to determine if you’re saving enough or not. You’ll need to know:
- Your child’s current age
- The number of years you’d like to help pay for
- How much money you can put aside each month
- The percentage of the cost you want to fund
You can even select which college your child might attend to get a more accurate estimation. There’s quite a difference in costs between public universities and private schools. According to a 2023 report from the Education Data Initiative, the tuition for public universities equals 26.1% of the tuition and fees for private colleges.1 And on average, college costs increase more rapidly than inflation — about two times faster.2
The John Hancock calculator, as seen here, illustrates if you’ll save enough to fully fund what you’d like or if you’re underfunded (and by how much). You can tweak the amount you save each month to see how much you should put aside to meet your goal. It’s a great tool for parents to see how much they should put back and when they should start planning.
What Are My Investment Options?
Once you determine how much to save each month, how do you know what type of investment vehicle to use? Here are your investment options for your child’s college fund:
529 Plan
The first option, and probably most popular, is the 529 plan. This plan allows you to invest after-tax dollars. They offer tax-deferred growth, and any distributions used for qualified education expenses are federal income tax-free.3 These qualified expenses include required items for degree seekers, such as:3
- Tuition
- Fees
- Books
- Room and board
Uniform Gift/Transfer to Minor Act (UGMA/UTMA)
Another college savings plan is a Uniform Gift/Transfer to Minor Act (UGMA/UTMA) account. Part or all of the earnings are exempt from federal income tax, and some or all may be taxed at the child’s rate, which is generally lower.4 When an investment held by a child generates income over the IRS threshold, the “kiddie tax” takes effect, and part of the child’s unearned income over the threshold amount could be taxed at the parent’s rate.5 The “kiddie tax” rules apply to dependent, full-time students under age 24.6 These accounts are tricky when it comes to taxes, so it’s best to talk to a financial adviser or tax expert before moving forward.
An adult acts as the UGMA/UTMA accounts custodian until the child is no longer a minor. At ages 18-21, depending on the state, the child owns and gains control of the account, which may not be your wish.5 These accounts are typically costly to the student in the financial aid equation.7
Coverdell ESAs
Another good option is a Coverdell ESA (Education Savings Account), which allows contributions of up to $2,000 a year per child for education (college or K-12) expenses. Earnings grow federally tax-free, and qualified distributions are federal income tax-free. Income limitations do apply, though.8,9
Roth IRA
Parents can also set up a Roth IRA under their name or even create a non-retirement mutual fund account. However, before starting any investment, it’s best to speak with an investment adviser or financial planner. They will discuss your current situation to gauge which type of investment best fits your needs.
Remember, the biggest lesson when saving for your child’s future college expenses is to start today. Even if it’s a smaller monthly investment, getting started is key. Scholarships and financial aid aren’t promised to everyone, and you never know what educational aid changes will be passed. The best solution for relieving that college debt is to make strides to help your children down the road.
