If you’re a new parent, you’re probably still in sticker shock over the long list of major expenses that come with a newborn: baby clothes, diapers, fancy strollers, a safe crib, and a college education. The first few things on that list are real, tangible expenses today – the last one? You might not be thinking about it today, but it’s going to become a very expensive reality in the future and a little preparation today could help bring down the costs.
There are two things that get brought up in every conversation about paying for college: the ridiculous price tag of tuition that keeps growing every year and the national epidemic of student debt. Both the rising cost of college and student loans dominate the headlines, but one thing that often gets neglected in the college conversation is the role of savings. And as a young parent, you’re in a great position to build up a great savings cushion.
Sure, savings isn’t the silver bullet to make college affordable since it won’t cover the entire price tag for a college degree. But savings will absolutely help cover the gap and certainly lessen the burden that many families face in covering the gap between their financial aid package and their tuition.
If you’re beginning to think about ways to pay for college in the future, here are a few smart ways to start saving:
529 plans. A 529 plan is an investment vehicle created specifically to pay for college expenses. A 529 plan is like a 401k for you or your child’s college education: they usually come with tax breaks, and funds contributed to the account must be used for a specific purpose (in this case, qualified college education expenses). Nearly every state has its own 529 plan, but you can actually contribute to any state’s 529 plan if you prefer their plan over your state’s own (just remember you might be giving up some of your own state’s tax advantages).
Custodial accounts (UTMA, UGMA and Coverdell). There are three specific accounts that many people use to save for college: UTMA (Uniform Transfer to Minors Act) accounts, UGMA (Uniform Gift to Minors Act) accounts and Coverdell Education Savings Accounts. UTMA and UGMA accounts act as a trust for your child, allowing you to put your assets aside specifically for your kid. While the structure of these accounts is very convenient for setting aside money specifically for your child, it may impact your financial aid eligibility, depending on your financial situation. Coverdell savings accounts are trust accounts specifically for your child’s college education. You can contribute up to $2,000 into a Coverdell account, and these accounts may be treated differently than UGMA and UTMA accounts when determining eligibility.
Ask your child to contribute to his or her college savings. If you have a teenager that’s already earning money or even if your child receives a cash birthday gift from an aunt or uncle, it might be appropriate to ask them to contribute a portion of their earnings toward their college education. Encouraging regular savings is a great habit for your child to form at a young age, and using some of that savings to help cover the cost of college can help instill a sense of ownership and self-efficacy when it comes to higher education.