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Starting a College Fund for Your Children

The tiny newborn in the hospital may not go to college for years, but you should have a college plan in place by the time your child is in elementary school. The question is not whether to save for college, but what resources are available to you and your child.

The best advice for a parent looking in to college fund is to start early. With the steady rise of college tuition, saving for college should be done sooner rather than later. According to USAToday, tuition and fees at state schools are climbing faster than at private colleges and universities. This year the cost of attending a four-year public university rose to about $7,605 annually, compared to the average cost of attending a private institution of $27,293 per year. Not to mention that this does not include text books, room & board or meal plans.

When is the right time to start saving for college? Truthfully there is no right time. Each family will have to determine their needs before starting a college fund. Use the following questions as a guide:

  • When will your child attend college?
  • How many children do you have? Calculate each child’s high school and college graduation years to determine how many children you will have in college at one time.
  • In the case of divorce, will your spouse pay part of the cost of college education?
  • Will grandparents pay any costs?
  • Do you have money saved for college?

After answering these questions, you will have a broader view of your family’s need for college savings. The calculations will change with the birth of children or with changes in employment.

Even with the best-laid plans, you cannot predict your children’s future college plans. What if one of your children decides not to go to college? Or one child gets a full scholarship to university? Or you receive an inheritance in your grandmother’s will?

Other factors that are not known when you start a college fund, include: the type of college your children will want to attend. Your son may want to major in a graphic design program only offered at a private institution. Your daughter might plan to attend a 4-year public university for pre-med studies, followed by medical at a private institution. Plan ahead. Plan for the unexpected. But, without fail...make a plan for your children’s college education.

What College Savings Plan?

The college savings plan you choose will not be the same as the plan your neighbor or business associate chooses. Each family’s needs are different. Options for saving include: a savings account at your bank, investing in stocks, putting money in a tax-free individual retirement account (IRA), savings bonds. Other options are listed below.

State-run Investment Accounts

In a state-run investment account, or 529 plan, your money can grow tax free. Any withdrawals are exempt from federal taxes as long as the money is used for college expenses. Check out options in each state at Saving for College.

With a 529 plan, parents can invest as little or as much as they can. One drawback is that 529s carry fees for opening and maintaining an account. As 529s are considered a parental asset, the amount of money in the 529 will affect your child’s eligibility for need-based financial aid. You can avoid this issue by having the child’s grandparents open a 529 plan in the child’s name.

Prepaid Tuition Plans

These plans, similar to 529s, allow parents to pay for a child’s tuition at a public university in advance at a set price. A plus is that you lock in today’s rate for tomorrow’s tuition. Only 15 states offer prepaid tuition plans. These plans apply to the public colleges and universities in that state only. A significant drawback is that you cannot predict where your infant or toddler will want to study once the college years hit.

Coverdell Education Savings Accounts

Similar to IRAs, Coverdell accounts allow parents to contribute up to $2000 per child annually. Your money grows tax free. A drawback...if you make more than $220,000 as a married couple or $110,000 as a single parent, you cannot open a Coverdell.

When To Save for College?

Once you have opened a college savings IRA or a savings account, start a regular pattern of putting money in the account. Deposit on the child’s birthday, monthly, or at holidays. If relatives give money to your child that they want put toward the child’s college account, deposit money immediately.

Become a good steward of your money. Take charge of saving for your children’s college education. Involve your children through discussions about money needed for college.