There are several different ways that you can save to pay for college, whether for yourself or your children. While regular savings accounts are certainly one option, there are others as well, with pros and cons that you should consider when you are considering what is best in your situation.
Maximizing Value
In addition to putting away money for college, you want to make sure that you take advantage of other funding opportunities, including scholarships and financial aid. Visiting the Marketplace by Navient can take you to where you can compare rates among top providers of student loans, scholarships, and more. This can help ensure that you’re making the most of your money.
529 Plan
Because it’s specifically designed to be for educational purposes, the 529 plan is the first thing that comes to mind for many people. There are some benefits of a 529 plan, including tax advantages. If you’re a dependent child, the 529 will still count as one of your parent’s assets for FAFSA purposes even if you own it. However, there are also some drawbacks to it, one of the biggest ones being that there is a penalty plus income tax if the money in it is not ultimately used for education.
Coverdell ESA
Like the 529, this is specifically designed for education savings, giving you the opportunity to earn interest tax-free. The Coverdell ESA also offers more options for investing than the 529. Like a 529, a Coverdell ESA is considered a parental asset on the FAFSA whether the child or parent owns it. However, you can only contribute $2,000 per beneficiary per year, and all contributions must be paid before the beneficiary is 18. This means there would not be enough in it to cover tuition at most schools, so you’d want another savings vehicle.
Retirement Accounts
Some parents turn to a retirement account to help fund their children’s education. While there are retirement mistakes to avoid there are also advantages. If the account is a Roth IRA, there’s no early withdrawal penalty for education expenses. However, there are also risks. A parent who borrows from a 401K and then loses their job might have to quickly repay the amount in full. In general, taking money out of the retirement fund for other expenses is just not a good strategy. You may want to save your child from having to carry student loan debt, but you don’t want to endanger your own retirement in doing so.
Dealing with Other Expenses
Another thing to keep in mind is that you’ll need to cover more than the cost of tuition and books. For at least four years, a student also must live somewhere, eat, and buy clothes. Then there are costs such as transportation and entertainment. Education-specific accounts are only supposed to be used for qualified expenses, so you’ll want to make sure that there’s also money for these other expenses. Mutual funds, U.S. savings bonds and custodial accounts are additional ways to save and invest for college that do not carry limits on how the money can be spent.
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